Saudi Arabia was the only country in the world to ban women driving.
The change, which will take effect in June 2018, was announced in a royal decree read live on state television and in a simultaneous media event in Washington.
Human rights watchdog Amnesty International said: "It is a testimony to the bravery of women activists who have been campaigning for years".
The Saudi ambassador to Washington said on Tuesday women would not need their guardians' permission to get a licence, nor to have a guardian in the auto when driving.
In the years since, female activists have kept at it, more recently uploading videos of themselves driving to YouTube to gain worldwide attention, and suffering insults, jail time and even the threat of punishment by lashing.
Previously, women in the Gulf nation could be arrested for driving.
"The issue of women driving was never a religious or a cultural issue", said Prince Khalid bin Salman, the Saudi ambassador to the United States, in a statement.
Unlike previous rulers, he has shown a willingness to tackle entrenched Saudi taboos, and is seen as catering to the aspirations of youth with an array of entertainment options and promoting more women in the workforce. The biggest issue may be winning the approval of Saudi Arabia's Wahhabi clerics, the most conservative of the Islamic faith. It was unclear whether women would require their guardian's permission to apply for driving licences. Women already dominate men in numbers at universities.
Stur said Saudi Arabia is one of the biggest allies of the USA, but there has been a lot of controversy about the lack of civil rights and liberties for women in that part of the world as the US works to bring democracy and freedom to parts of the Middle East. Yet despite this high level of education, more than a third of women remain unemployed. The ban holds women back from jobs, leaves them dependent on male relatives or drivers. That women are being allowed to help support themselves right now is awfully convenient - part of careful manoeuvring by the House of Saud, which wants to ease the country toward private employment while managing the demands for social change that will bring.
The decree added that the majority of the Council of Senior Scholars - the kingdom's top clerical body, whose members are appointed by the king - had agreed that the government could allow women to drive if done in accordance with syariah law.