The breakthrough announcement came as the countries met for their first high-level talks in more than two years.
The delegation will include athletes, officials and supporters.
South Korea also proposed holding family reunions during the Winter Olympics for people separated by the Korean War.
What’s happened at the talks?
They have resumed after a break for lunch and the developments have been conveyed by officials from the South:
Vice unification minister Chun Hae-Sung told journalists: “The North side proposed dispatching a high-level delegation, National Olympic Committee delegation, athletes, supporters, art performers, observers, a taekwondo demonstration team and journalists” to the Games
The South proposed that athletes from both Koreas march together at the opening ceremony in Pyeongchang as they did at the 2006 Winter Olympics
The South pushed for family reunions, a highly emotional issue for both countries, to take place during the Lunar New Year holiday, which falls in the middle the Games
The South also proposed resuming negotiations over military issues and the North’s nuclear programme
The South said it would consider temporarily lifting sanctions, in co-ordination with the UN, to facilitate the North’s participation in the Olympics
The North’s response to all of the South’s proposals is not yet known. The opening remarks of head of the North Korean delegation, Ri Son-gwon, were fairly neutral.
He said he hoped the talks would bring a “good gift” for the new year and that the North had a “serious and sincere stance”.
Where are the talks and how did they come about?
The talks began early on Tuesday in the Panmunjom “peace village” in the demilitarised zone (DMZ) at the border.
Image copyrightGETTY IMAGESImage captionNorth Korea first expressed interest in joining the Pyeonchang Games during the New Year
There are five senior officials on each side.
In his New Year address, North Korean leader Kim Jong-un had said he was considering sending a team to the Olympics. South Korea’s Olympics chief had said last year that the North’s athletes would be welcome.
Following Mr Kim’s overture, the South then proposed high-level talks to discuss the North’s participation, but the North only agreed to the talks after the US and South Korea agreed to delay their joint military exercises until after the Olympics. The North sees the annual drills as a rehearsal for war.
Some critics in the US see the North’s move as an attempt to divide the US-South Korea alliance.
Analysis: BBC’s Rupert Wingfield-Hayes in Seoul
A little over a week ago North Korea was threatening nuclear war – this morning a delegation from Pyongyang strode across the demarcation line that divides North and South Korea and agreed a North Korean delegation would attend the Pyeongchang Games.
It is a sudden and dramatic change after months of tension. But few in the South believe any of this demonstrates a fundamental shift in Pyongyang’s position.
Experts say North Korea’s leader Kim Jong-un has become increasingly fearful that the US is planning a military strike against him, and has decided he must do something to de-escalate tensions.
South Korea’s president Moon Jae-in has been thrust in the delicate position of trying to engage the North in genuine dialogue, while not upsetting his very sceptical American ally.
Back in 2015.
Relations then broke down after Seoul suspended a joint economic project at the Kaesong Industrial complex in North Korea following a rocket launch and nuclear test by the North.
The incident led to North Korea ending all communication with Seoul, including cutting off telephone lines.
Tensions have risen in the years since, as the North continues to rapidly advance its banned nuclear weapons programme.
What might we expect at the Olympics?
Pyeongchang, approximately 180km (110 miles) east of Seoul, will host both the Winter Olympics in February and the Winter Paralympics in March.
There has been no official announcement on the make-up of the North Korean team.
Only two North Korean athletes had qualified for the Games – figure skaters Ryom Tae-ok and Kim Ju-sik – although even they missed the participation deadline and would need IOC clearance.
There may be possible wild-card entries, perhaps in short-track speed skating and Nordic skiing, but this has not been confirmed.
North Korea has participated in the Olympics before, but not in South Korea. It boycotted the 1988 Olympic Games in Seoul.
What is the significance of Panmunjom?
After the Korean war ended in a truce in 1953, Panmunjom was designated as the one place where officials from both sides could meet.
The “truce village” is divided into two parts by a military demarcation line: one side belonging to the North, the other to the South.
In the middle of the village sit the UN Command buildings, crossing the middle of the line.
Last year, a North Korean defector made a dash through the DMZ, managing to cross over to the South Korean side of Panmunjom.