The IRA has changed radically and some of its most important structures have been dismantled, the body monitoring paramilitary activity has said.
The government hopes the report by the Independent Monitoring Commission will help its efforts to restore devolution in NI before the 24 November deadline.
It is the IMC's most positive report about IRA activities to date.
It said the IRA does not want to go back to violence and no longer has the capacity to mount a sustained campaign.
The IMC's 12th report, published on Wednesday, indicates that a number of key parts of the IRA's structure have been dismantled or substantially reduced.
Presenting the report, commissioner Lord Alderdice outlined how the IRA leadership was "clamping down" on criminal activity by its members.
"That doesn't mean that criminal activity by all members has stopped but the leadership has made public statements and internal directions, investigated incidents of breach of the policy, even expelled some members and has emphasised the importance of ensuring that business affairs are conducted in a legitimate way," he said.
The report said there was not enough evidence or intelligence information for it to say who killed Denis Donaldson, the self-confessed British spy and former head of Sinn Fein's office at Stormont, who was shot dead in County Donegal in April.
DUP leader Ian Paisley said the report showed pressure from the DUP was working.
"As I have indicated on numerous occasions, the days of pushover unionists are gone and Sinn Fein/IRA know that they can no longer expect to be engaged in terrorist and criminal activity and be in government in Northern Ireland," he said.
Sinn Fein President Gerry Adams said: "The DUP don't have anything other than very limited options.
"They will or will not participate in power-sharing arrangements. If they don't participate they are condemning people here, but particularly their own constituents, to second class public services, run by second class fly-in, fly-out British ministers.
"All the DUP can do is to delay, is to attempt to slow down, but they can't stop the process of changing."
Northern Ireland Secretary Peter Hain said: "We believe this report does lay the basis for a final settlement of the conflict in Northern Ireland and an end to the political stalemate.
"As such we think it presents a unique opportunity for this generation of politicians to reach that final solution, an opportunity the government hopes the parties will now seize and not miss a fantastic window."
In a statement, Irish Taoiseach Bertie Ahern "warmly welcomed" the report's findings.
"These positive and clear-cut findings are of the utmost importance and significance," he said.
Referring to talks due to take place in Scotland next week aimed at restoring devolution he said: "It is time to make decisions and for Northern Ireland to look to the future."
The SDLP's Alasdair McDonnell said: "What's very clear is that the Army Council has moved forward and dismantled the war machine.
"I welcome the moves the IRA have made."
PUP leader David Ervine said he did not accept that the IMC was independent.
"There is a trend that suggests that our war is over," he said.
The UUP's Dermot Nesbit said that while "IRA terrorism and paramilitary activity" has ceased the "organisation remained".
"The IRA is still an illegal organisation and it is using illegally gained funds for political purposes," he said.
The Independent Monitoring Commission was set up by the British and Irish governments in January 2004.
Most of its reports have concentrated on activity by paramilitary groups in Northern Ireland.
However, it also monitors the "normalisation" of security measures in the province.
Its four commissioners come from Northern Ireland, the Republic of Ireland, Britain and the US.