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Investors in Israel and the United Arab Emirates are moving to strike deals in a business environment transformed by a diplomatic breakthrough between the two countries.

Last week’s surprise move by the UAE to normalize relations with Israel in a US-backed shift paves the way for establishing direct flights, opening telecommunications links, exploring joint ventures and, in some cases, bringing commerce that has long been underground into the open. The change has the potential to warm ties between Israel and the Arab world and benefit a range of business sectors, from aviation and finance to health and tourism.

Emirati billionaire Khalaf Al Habtoor, who owns one of the UAE’s largest conglomerates Al Habtoor Group, said he has launched talks with Israir Airlines Ltd, a domestic Israeli carrier, to open direct commercial flights.

Avi Eyal, the managing partner of Israel-based venture-capital firm Entree Capital, says he has received dozens of LinkedIn messages and phone calls from Israelis and Emiratis interested in entering the other market. He is working with Emirati partners to establish a kind of chamber of commerce or professional organization to formalize bilateral business ties, Mr. Eyal said.

Gadi Nir’s small Israel-based company Bo&Bo Ltd, which sells physical-therapy machines that monitor patient progress, can now move ahead with direct sales to the UAE—a less expensive option than shifting some operations to China, which would have allowed him to enter the market before the two countries moved to establish formal ties. Under a deal announced Tuesday, an Emirati firm, which hasn’t been named, will be Bo&Bo’s exclusive Gulf distributor for around $1 million a year that the distributor pays the Israeli company.

“For a small business in Israel, this amount is amazing," said Mr. Nir.

Before the move to formalize relations, conducting business between the two countries required some degree of stealth. Deals were struck through subsidiaries in third countries, such as Singapore or Cyprus. Direct calls between parties required overseas numbers. Virtual private networks were needed to access websites blocked by the governments. And some used foreign passports to travel between the two countries.

An Israeli businessman with a traditionally Jewish name said that when he showed his US passport at UAE immigration for the first time about a year ago, he told the customs officer he was traveling from New York, even though his place of birth was listed as Israel.

“That’s an interesting name you got," he said the Emirati officer told him before eventually allowing him to enter Dubai. “I felt like I was in a James Bond movie," he added.

Because trade between Israel and the UAE has been largely routed through third countries, official figures aren’t available. The Tony Blair Institute for Global Change, a UK nonprofit organization that does government advisory work, estimated in a research paper that total Israeli trade with the Gulf Arab states is only about $1 billion.

Investors in both countries hope the rapprochement will spawn more opportunities than the cold peace with neighboring Egypt and Jordan. Treaties forged with these countries over a quarter-century ago have produced meager economic dividends. In 2018, Egyptian exports to Israel measured about half a billion dollars in 2018, with imports under $115 million, according to the World Bank. Trade with Jordan is even more paltry—less than $80 million in each direction.

Turkey, which restored diplomatic ties with Israel in 2016, conducted total trade with Israel of more than $8 billion in 2018, much of which was in petroleum products, World Bank data showed.

One upside for the UAE: It doesn’t share Egypt’s and Jordan’s history of conflict with Israel. The former British protectorate only gained independence in 1971, after two of the three Arab-Israeli wars were fought. And its population is composed overwhelmingly of foreigners more likely to engage with Israel than Egyptians and Jordanians.

“There already was an Emirati-Israeli relationship of sorts, so why pretend it wasn’t there?" said Hady Amr, former US deputy special envoy for Israeli-Palestinian negotiations. “Let’s all acknowledge it and work on that as a basis of reality."

Doing business between the two countries will still be sensitive for some as a result of the long history of tensions between Israel and the Arab world. As a part of the move to formalize ties, Israel agreed to suspend its plan to annex parts of the occupied West Bank.

“Business is an amazing way to normalize the relationship between two human beings, and maybe that is a way to bridge whatever gap there might be as a result of accumulated history," said an Emirati venture capitalist, who asked not to be named.

The Emirati venture capitalist is among those who are ready to begin scouting for deals in Israel. He said he began studying Hebrew 18 months ago out of affinity for history and Israeli music. Given the region’s political intransigence, he had no realistic expectations of ever being able to capitalize on that proficiency—until now.

“I was hoping in my heart that something like that would happen," he said. “I wanted people to connect and understand each other."

The deal between Israel and the UAE might put pressure on other Arab countries to follow in the Emiratis’ footsteps. Israel and Sudan said on Tuesday that they were working on an agreement to formalize relations.

But most Arab states have resisted rapprochement with Israel until there is a durable peace deal with the Palestinians. Direct flights between Israel and the UAE will require permission to fly over at least one neighbor, Saudi Arabia, that still doesn’t recognize Israel. Israeli Prime Minister Benjamin Netanyahu has said he is trying to secure that permission.

Still, normalizing once-secret and often-circuitous dealings between the UAE and Israel is a big step forward, according to Erel Margalit, founder of venture-capital firm Jerusalem Venture Partners, which invests in startups in Israel, the US and elsewhere. He said about 10 of his portfolio companies in recent years have either sold products to or co-invested with Emirati firms, and the pace of deals is picking up.

“The ability to go and fly on commercial flights," he said, “without a special permission as an Israeli and be able to host them here, be in a conference, work with a few companies, all these things will make it easier."

Write to Felicia Schwartz at Felicia.Schwartz@wsj.com and Stephen Kalin at stephen.kalin@wsj.com

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