US President George W Bush has said Canada will now be "eligible to bid" for reconstruction projects in Iraq.
Bush said the US and Canada shared the same values of freedom
His offer to Canadian Prime Minister Paul Martin halts a controversial US policy of reserving work for those countries which backed the war.
"They want Iraq to be free. They understand the stakes," Mr Bush said after meeting Mr Martin at a summit of American leaders in Monterrey, Mexico.
But it appears France and Germany will not yet be allowed to bid for work.
Last month, the Bush administration ruled that prime contracts to rebuild Iraq would only be open to countries that had supported the invasion of the country - not including Canada and other traditional allies.
It said the decision, which angered many US allies, was taken on the grounds of national security.
After this latest announcement, Canada is expected to be able to bid for Iraq contracts worth about $4.5bn.
The position of other countries which opposed the US-led war in Iraq, such as France and Germany, is unclear, although the US indicated they could be allowed to bid for future contracts.
US National Security Council spokesman Sean McCormack said: "For those countries that want to join our efforts in Iraq, circumstances can change."
The BBC's Ian Pannell, in Monterrey, says allowing Canada to bid for lucrative contracts is a major policy reversal and one designed to win back an important regional ally.
He said the two countries have grown increasingly distant over recent months, particularly over the issue of Iraq.