Owner Ineos announcement the plant would reopen with immediate effect and said it was pleased people had "finally come to their senses".
The announcement was made following talks between the company, the Unite trade union and politicians.
Ineos will restart the oil refinery on the site and shareholders will invest a further £300m in the business.
Jim Ratcliffe, Ineos chairman, said: "This is a victory for common sense. The Unite union urged employees to reject change and vote for closure.
"Thank goodness people finally came to their senses. Grangemouth now has a great future."
The company added the decision was taken following the union's "dramatic U turn and its belated recognition that the company's survival plan is the only way to ensure Grangemouth's long term survival".
Under the deal there will be no strikes for three years, a change in pension arrangements, a pay freeze for three years and changes to union agreements including no full-time union conveners..
Calum MacLean, Grangemouth (UK) chairman said, "Unite risked 800 jobs and one of the UK's largest manufacturing facilities over a union official investigation before any verdict had been announced.
"It then advised employees to reject the change essential to the survival of Grangemouth. Today's U turn means Grangemouth now has an excellent future".
Pat Rafferty, Unite Scottish secretary said: "This decision is clearly very welcome. Relief will ring right round the Grangemouth community, and across Scotland today. Hundreds of jobs that would have been lost can now be saved and £300m will be invested into the plant.
"Grangemouth is the powerhouse of the Scottish economy - it now has a fighting chance of upholding this crucial role into the future.
"Obviously today's news is tinged with sadness - decent men and women are being asked to make sacrifices to hold on to their jobs, but the clear wish of our members is that we work with the company to implement its proposals.
"Unite has worked tirelessly to save Grangemouth because we are totally committed to this plant and its incredible workforce. We will now sit down with Ineos to consult on the company's proposals."
Scotland's First Minister Alex Salmond said: "This news is a tremendous fillip for the workforce and the whole Grangemouth community, following what could have been a potential disaster.
"It's been a great team effort from all concerned, including the unions and workforce, the management, Governments - and BP, who have made a material contribution to help defend and secure Scottish jobs and livelihoods.
"I am delighted that people have rallied round to protect these jobs, and now we can all agree that Grangemouth has an outstanding future.
"Clearly for many people across the communities of the Forth Valley, Wednesday was a day of despair - today is quite different, and is a day of great satisfaction that not only has a key part of Scotland's industrial infrastructure been saved but that people can look forward with confidence to a bright future.
"There will no doubt be continued debate and recrimination in some quarters about why the future of this facility went so close to the cliff edge.
"However, as First Minister, I prefer to stress the positives including the fact that so many people have gone the extra mile to secure Grangemouth's future."