The Iraqi parliament has passed legislation allowing former officials from Saddam Hussein's Baath party to return to public life.
Saddam Hussein's Baath party was predominantly Sunni
The US had been urging Iraq's Shia-led government to approve the move in a bid to reach out to minority Sunni Arabs.
It will allow thousands of former party members to apply for reinstatement in the civil service and military.
US President George W Bush, who is in the Gulf, called the new Iraqi law "an important step towards reconciliation".
Mr Bush was speaking in Bahrain, the latest stage in a tour of the Middle East. Earlier, in Kuwait, he said hope was returning to Iraq.
Saddam Hussein was executed on 30 December 2006 after a special tribunal found him guilty of crimes against humanity.
WHO ARE THE BAATHISTS?
The party was the political instrument of Saddam Hussein's rule
An estimated 2.5 million Iraqis were party members
Banned and broken up by US administrator in May 2003
Baathism was a pan-Arab secular nationalist movement
His regime was predominantly Sunni and many figures were removed from government after his fall in 2003, under an edict from ex-US administrator Paul Bremer.
The army was disbanded, thousands of teachers, university lecturers and civil servants were sacked.
The initiative, based on the de-Nazification of Germany after World War II, banned anyone who had been a member of the higher tiers of the party from government employment.
Some were reinstated after the US found that it had cleared out key ministries and the military without having any replacements.
After the Americans handed over power to an Iraqi government in 2004, they urged the Shia-led administration to ease the measures further in an effort to promote national reconciliation.
Much of the Sunni insurgency is thought to be centred on dismissed military men from the Baathist regime.
The new legislation - called the Accountability and Justice Law - was approved on Saturday by all 143 lawmakers present in the 275-member house.
It creates a three-month period for the ex-members to be challenged, after which they will be immune from prosecution over the Saddam era.
The law excludes former Baath members charged with crimes or still sought for them.
However, it will grant state pensions to many former Baathist employees even if they are not given new posts.
The BBC's Humphrey Hawksley in Baghdad says the legislation is seen as an attempt by the government to end the sectarian divide between the Shia and Sunni communities.
But almost five years on, after much bloodshed, it is unclear how many former Baathists will take up the offer to get their jobs back, our correspondent adds.
A spokeswoman for the US embassy in Baghdad told Reuters news agency that the new law showed "the political process is working in Iraq".
Meanwhile, Mr Bush said there had been a dramatic improvement in the country since the US troop "surge" last year - when 30,000 extra soldiers were sent to the Baghdad area.
"Hope is returning to Baghdad, and hope is returning to towns and villages throughout the country," he said during a visit to a US base in Kuwait.
He added that US and Iraqi soldiers had dealt "heavy blows" to al-Qaeda, and that the country was "now a different place from one year ago".
He said the withdrawal of 20,000 troops by July was on track, but no decision had been taken to bring home more.