Gurkhas who have served in the British Army are to be allowed to apply to settle in the UK and gain British citizenship.
Many Gurkhas think UK citizenship is the least they deserve
The announcement made by Tony Blair follows a government review and a campaign by the Nepalese soldiers.
The prime minister said the Gurkhas had made an "enormous contribution" and it was important that their commitment and sacrifice were recognised.
Gurkhas have fought as part of the British Army for almost 200 years.
From now on, Gurkhas who leave after more than four years' service will be able to apply to stay in the UK.
It is expected that most will be granted indefinite leave and citizenship after a further 12 months.
But the rules do not apply to those discharged from the armed forces before July 1997.
According to the Brigade of Gurkhas Welfare Society, that means 100 Gurkhas in the UK - a quarter of the total number who live here - will not be entitled to stay.
"This is extremely good news in a way but it is not a 100% celebration because of the cut-off date," said Maj Tikendradal Dewan, chairman of the Brigade of Gurkhas
"It's difficult to rejoice at the news when we know that something like a quarter of the guys will not benefit
But Bidur Pakhrin, who was a private in the Gurkhas between 1988 and 2003 and is vice chairman of the Brigade of Gurkhas Welfare Society, welcomed the announcement.
He told BBC Radio 4's Today programme: "In the first place it was such a long overdue announcement. We had been waiting in some cases more than three years.
"We must say we are quite happy with the announcement considering we have made 200 years of contributions to the country."
For many years, members of the regiment have been pushing for rights to British citizenship after their retirement and
better conditions during their army service.
In 2003, seven former members of the regiment lost a court case for the same pay and pensions as other UK soldiers.
Mr Blair said: "The Gurkhas have served this country with great skill, courage and dignity during some of the most testing times
in our history.
"They have made an enormous
contribution not just to our armed forces but to the life of this country, and it is important their commitment and sacrifice is recognised."
Human Rights lawyer Phil Shiner said Mr Blair's announcement was a major "breakthrough".
He added: "It removes the government's basis for continuing to discriminate against the Gurkhas.
"What we have now is a position where the Gurkhas should be allowed to have their wives and families here as the British are.
"The Gurkhas should be paid the same and if the Gurkhas have the right to remain living and working in the UK after their service remains then of course they should be paid the same pension."
Home Office officials said the new immigration regulations would be
phased in very soon.
The Nepal Ex-Servicemen's Association thanked the British government for allowing ex-Gurkhas to apply to settle in Britain and seek fast-track citizenship.
NESA's chairman, Major Deepak Garung, added: "What matters most is UK work permits, not citizenship, and anyone who has served as a Gurkha for more than four years should be entitled to those, as should their families."
The Gurkha regiment now has around 3,500 men.
In recent years, the Gurkhas have served in UK interventions in Bosnia, Kosovo, Afghanistan and Sierra Leone.