Israel is returning an ambassador to Vienna for the first time since it broke ties with Austria when a far-right party came to power.
The Israeli flag is set to fly in Vienna once more
Foreign Minister Silvan Shalom announced the decision after talks in Jerusalem with his Austrian counterpart, Benita Ferrero-Waldner.
"After three and a half years, we have decided to restore full diplomatic relations with Austria," he told reporters.
Israel withdrew its ambassador in 2000 after Joerg Haider's right-wing Freedom Party joined the new coalition government.
The party was known for its anti-Semitic sentiments
and derogatory attitude towards foreigners.
"Israel cannot remain silent in the face of the rise of extremist right-wing parties, in particular in those countries which played a role in the events which brought about the eradication of a third of the Jewish people in the Holocaust," said a foreign ministry statement at the time.
However, relations between the two countries have warmed following Austria's offer of compensation for Holocaust survivors and their descendants, as well as the Freedom Party's slide in popular support at last year's elections.
The two foreign ministers visited Israel's Holocaust memorial Yad
Vashem, before an hour-long meeting at the foreign ministry.
Sitting beside Mrs Ferrero-Waldner afterwards, Mr Shalom said: "Israel will now appoint an ambassador to Vienna and will today
remove all the restrictions that we imposed on its relations" with
Mrs Ferrero-Waldner said: "Austria welcomes the restoration of diplomatic relations in
Vienna to ambassadorial level."