Vice-President Hashemi (L) withdrew his veto after the vote
Iraq's parliament has unanimously approved a new electoral law, paving the way for elections early next year.
Parliamentarians were called to vote in a special late-night session to try to end a political crisis, and they voted minutes before the midnight deadline.
The White House said the move was "a decisive moment for Iraq's democracy".
The deputy speaker of parliament said an election should take place on 27 February, but it was unclear whether this would be possible.
The new law is said to have been brokered by the UN and the US embassy.
Polls originally scheduled for 16 January had been delayed due to problems with the election law.
"This is wonderful and a huge achievement for Iraq," said deputy speaker Khalid al-Attiya.
"Now the way is paved to conduct the election at a date to be determined by the presidency council."
Last week, the United Nations said a new feasible election date was 27 February.
Vice-President Tareq al-Hashemi had vetoed the previous version of the law, saying it did not provide enough seats for the country's Sunni minority.
There have been many protests at the electoral law in the past few months
Following the parliamentary vote, he formally withdrew his veto of the election law and praised the new amendment as providing a fairer deal for Iraq's minorities.
About four million Sunnis fled the country to escape violence that erupted after the US-led invasion.
"I would like to congratulate the Iraqi people for this historical victory," Mr Hashemi said.
The compromises reached by politicians had "got Iraq out from the bottleneck and out of a problem", he said.
White House spokesman Robert Gibbs said the US welcomed the new resolution.
"This legislative action will allow Iraq to hold national elections within Iraq's constitutional framework," he said.
Debate over the electoral law had also centred around the northern, oil-rich city of Kirkuk, which is disputed between Arabs, Kurds and Turkmen.
The new parliament will be expanded from the current 275 seats to 325, said Mr Attiya.
The election is seen as a prerequisite to the US meeting its goal of pulling out combat troops by August next year, and withdrawing fully by 2012.