Pope Benedict XVI has reversed a controversial decision he took a year ago to downgrade the Vatican department which deals with the Islamic world.
The Pope has been repairing damaged relations with Muslims
The Council for Interreligious Dialogue will be restored to its former position as a department in its own right.
It is not clear if the department's former head, British archbishop Michael Fitzgerald, will also be reinstated.
His removal was seen as a sign the Pope was more interested in improving ties with other Christian denominations.
The BBC's David Willey in Rome says that by reversing his decision, which was interpreted negatively in the Muslim world, the Pope has tacitly admitted that this was a mistake.
Relations between the Vatican and Muslims have deteriorated over the past year, particularly over remarks made by the pontiff during a visit to Germany last September, in which, some thought, he appeared to equate Islam with violence.
The Pope insisted his words had been taken out of context and that he meant no offence to the Muslim religion.
In a rare about face, Vatican Secretary of State Cardinal Tarcisio Bertone told the Italian newspaper, La Stampa, that the Council for Interreligious Dialogue would again become "a dicastery in its own right".
In March 2006, the Pope had downgraded the office by merging it with the Pontifical Council for Culture.
"The change highlights the importance of inter-religious dialogue," Cardinal Bertone said.
The cardinal did not, however, identify who would be asked to lead the council after its reinstatement.
The last president, Archbishop Fitzgerald, an expert on Islamic affairs, was appointed papal nuncio to Egypt and the Vatican's representative at the Arab League in Cairo.
Our correspondent says the archbishop, a fluent Arabic speaker, is much respected as a negotiator for the Vatican within the Muslim world.