John Spellar with the new number plates
Vehicles have only been allowed to show a European Union flag with the letters GB underneath since the registration system was overhauled in September.
But that move angered many motorists and led to calls for a u-turn from nationalist politicians in both Scotland and Wales.
Now Transport Minister John Spellar has announced that motorists in the UK can again choose to have a Saltire, St George's Cross or Welsh dragon on their registration plates.
The decision follows a review by the vehicle licensing body, the DVLA.
It was ordered by Mr Spellar after the ban on national flags led to complaints from Scottish and Welsh nationalists.
Scottish Secretary Helen Liddell and the former Scottish Transport Minister Sarah Boyack had also supported a change of heart.
The law will be changed so that national flags like the Saltire - the blue cross of St Andrew - can be displayed on the left hand side of the number plate.
It should come into effect later in the New Year and the Mr Spellar called on the police, who were consulted on the overhaul, not to prosecute motorists carrying the symbols in the meantime.
Driving offences
However, drivers will be required to display a separate GB sticker when travelling outside the UK.
"It is what the people of England, Scotland and Wales have asked for and strengthens their feeling of national identity," Mr Spellar said.
However, Scottish National Party transport spokesman Kenny MacAskill described the move as "a humiliating defeat" for the government.
The list MSP for the Lothians had campaigned for a u-turn on the decision.
He said that those who were unable to diplay the SCO plates since September should now be given them free of charge.
"We have had several months where people couldn't get SCO number plates even though they wanted them," he said.
"Having said that, we don't want to look a gift horse in the mouth and I'm glad that Scotland will once again have its national identifier."
British drivers will also be able to include the letters ENG, SCO and CYM on their plates.
RAC spokeswoman Sue Nicholson said the announcement was a "victory for common sense".
AA spokesman Michael Johnson also welcomed the move, although he warned that there were "problems ahead".
"Even though you may change your number plate so that it has the cross of St Andrew or the dragon for Wales on it, you will still have to have the GB sticker when you travel abroad," he said.
But he added: "A lot of people in Scotland, and indeed a lot of people in Wales, felt that they ought to have their national flag on number plates and there was no good reason why they shouldn't."