They called the funding ban the "gag rule" because it cuts funds to groups that advocate or lobby for the lifting of abortion restrictions.
The Planned Parenthood Federation of America hailed the president for "lifting the stranglehold on women's health across the globe with the stroke of a pen."
"No longer will health care providers be forced to choose between receiving family planning funding and restricting the health care services they provide to women," the organization said in a statement.
But anti-abortion groups were quick to criticise the reversal of the funding ban.
"President Obama not long ago told the American people that he would support policies to reduce abortions, but today he is effectively guaranteeing more abortions by funding groups that promote abortion as a method of population control," said Douglas Johnson, legislative director of the National Right to Life Committee.
A 1973 decision by the US Supreme Court legalised abortion.
A Gallup poll conducted last year showed that 54% of Americans think abortion should be allowed under certain circumstances, 28% believe it should be legal under any circumstances, while 17% back a total ban.
The policy has become a see-saw issue between Republican and Democratic administrations.
Former President Bill Clinton, a Democrat, repealed the policy when he took office in 1993 and George W Bush reinstated it in 2001.
The ruling is also known as the Mexico City Policy, because it was first introduced at a UN conference there in 1984 by former Republican President Ronald Reagan.
In a move related to the lifting of the abortion rule, Mr Obama is also expected to restore funding to the UN Population Fund (UNFPA) in the next budget, the AP news agency reported.
The Bush administration contended that the fund's work in China supported a Chinese family planning policy of coercive abortion and involuntary sterilisation, claims the UNFPA has vehemently denied.
In a separate move earlier on Friday, US regulators cleared the way for the world's first study on human embryonic stem cell therapy.
While the decision of the US Food and Drug Administration is independent of White House control, Mr Obama is widely expected to adopt a more pragmatic and science-oriented approach to stem cell research.
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