The decision came after a divisive day of talks on whether to create a new government for a "United States of Africa," a move championed by Libyan leader Muammar Gaddafi.
AU Commission chairman Jean Ping said the new authority would have a broader mandate than the existing commission. The body will be headed by a president and a vice-president, and the commissioners will become secretaries charged with portfolios.
"In principle, we said the ultimate is the United States of Africa. How we proceed to that ultimate, there are building blocks," he said.
"We are creating an institution with a bigger mandate, with bigger capacities, which moves us toward the goal of the union government," Mr Ping said of the new authority.
Governments will still retain their sovereignty, as under the existing system, he said.
Many African leaders are reluctant to relinquish any of their sovereignty to a new government, while some favour strengthening regional institutions before creating a continent-wide system.
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