Trade in most products will be permitted as will direct flights between the two countries.
However, arms exports will remain banned, along with the sale of certain types of technology which could have military use.
The decision comes just days after an historic summit between North and South Korea, when the two countries agreed to work towards reunification.
However, the restarting of trade between the US and North Korea will not herald a complete thaw in relations.
The US says it will continue to oppose loans to North Korea from global financial institutions, because of what Washington sees as the North's continued support of terrorism.
Even after last week's ground-breaking North-South summit - which President Clinton described as an encouraging development for the entire world - the US made clear it still saw North Korea as a potential military threat.
It ruled out the early withdrawal of US forces from the South.
Timing significant
The US has also made clear it intends to press ahead with plans for an anti-missile system to deal with the possible threat of a North Korean strike, a policy which is straining US-Russian relations.
But the timing of the announcement easing sanctions is being seen as significant, coming so soon after the North-South summit.
President Clinton announced last September that he was intending to go ahead with the easing of sanctions.
BBC Washington Correspondent Rob Watson says there is no doubt that the summit helped in making the final decision.
At the summit, the North's leader, Kim Jong-il and the South's Kim Dae-jung agreed on a range of measures to reduce tension between their two states.
They include granting permission for families divided in the war to be reunited for the first time, and investment by the South in the impoverished North.
The US government says the sanctions easing is designed to improve relations and to "encourage North Korea to refrain from testing long-range missiles."
Anniversary
North Korea agreed to halt its tests after lengthy negotiations last summer, when the US said sanctions would be slackened in return.
The decision by Washington to finally go ahead with the policy comes less than a week before the 50th anniversary of the outbreak of the Korean War, on 25 June.
The three-year war, between the Soviet-backed North and the US-backed South, left a legacy of hostility between Washington and Pyongang which outlasted even the Cold War.