India's Prime Minister Narendra Modi had earlier pledged support for the Pacific Islands at a summit in the capital Port Moresby.
Washington and its allies are seeking to deter Pacific island nations from forming security ties with China, a rising concern amid tensions over Taiwan.
Leaders of the Pacific islands, whose territories span 40 million square kilometres of ocean, have said rising sea levels caused by climate change are their most pressing security priority.
Meeting with PNG Prime Minister James Marape, Blinken said the US would deepen its partnership across the board with PNG.
They discussed economic development, the climate crisis, and the importance of continuing US engagement with the Pacific, the State Department said in a readout.
"The defence co-operation was drafted by the United States and Papua New Guinea as equals and sovereign partners," Blinken said at a signing ceremony.
It will expand PNG's defence capabilities to enhance humanitarian assistance and disaster response, and make it easy for US and PNG forces to train together, Blinken said.
"It will be fully transparent," he said.
A separate agreement would increase maritime surveillance of PNG's exclusive economic zone through US Coast Guard patrols, protecting its economy from illegal fishing.
Blinken said partnerships with businesses would bring tens of billions of dollars worth of new investment to PNG.
US President Joe Biden sent "his regret that he was not able to be here", he said.
Biden was forced to cancel his travel to PNG amid debt ceiling negotiations in Washington.
Marape said the agreement would boost economic security by giving PNG's defence force "the ability to know what is happening in its waters - something we have never had since 1975".
Several universities held protests at campuses against the signing of the Defence Cooperation Agreement, with opposition politicians saying it would upset China.
Marape has denied it would stop PNG from working with China, an important trade partner.
The US defence agreement was an extension of an existing agreement, he said earlier.
Modi told the 14 leaders of the Forum for India-Pacific Islands Cooperation India would be a reliable development partner to small island states, and was committed to a "free, open and inclusive Indo-Pacific".
"Without any doubt, we are willing to share our capabilities and experiences in digital technology, space technology, health security, food security, climate change and environment protection," he said in opening remarks.
The Quad leaders of Australia, the US, Japan and India had agreed in Hiroshima to increase co-operation with Pacific Island countries, he said.
In his opening remarks, Marape urged India to think of small island states who "suffer as a result of big nations at play".
Marape said Russia's war with Ukraine, for instance, had caused inflation and high fuel and power prices in the region's small economies.
