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We need to arrange Ethernet network between two cities - this gonna be a partnership with other organization: we help them with equipment and get some bandwidth.

I am newbie beyond 1 Gbit networks, so please forgive me if I sound silly. Here is what I know:

Cities are connected with ~700 km fiber optical link, owned by local telephone provider. Provider gives to our partner one STM-64 circuit (from Huawei DSLAM(?)) which we need to convert to Ethernet on both sides. 100Mbps out of STM-64 will suffice for our partner, but I understand that ideally it can be up to 10Gbps(right?).

  our LAN\                                  /our LAN
          converter --- STM-64 --- converter
their LAN/                                  \their LAN

What type of hardware should be used for conversion? multiplexer? router? fiber optic modem? Could you recommend good reading on the subject?

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Not sure if a "converter" is a good idea here, you need routing. However STM-64 (OC-192) router interfaces tend to be very expensive and you need routers capable of handling 10Gbit of traffic. A pair of Cisco 7604 routers with Sup720 and an OC-192 SPA would do the job, but will cost about $25k each. If 100Mbit is all you need there is very little reason to use expensive interface cards for this, the telco is probably much happier for you to take an OC-12.

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