Finance Minister Benjamin Netanyahu was expected to approve the measure soon, said a ministry spokeswoman on Wednesday.
Israel still classifies Iraq as an enemy state.
The Maariv Daily reported that Israeli exporters would be able to start trading with Iraq within days, once the law was amended. The measure follows the ousting of former Iraqi President Saddam Hussein.
The change would be limited to one year after which the decision would be reviewed, reported Maariv. However, Iraq would not be removed from the list of enemy states and Israelis would not be allowed to visit the country.
The finance ministry was working on the amendment along with the foreign and justice ministries, said the spokeswoman. She was unable to say when the law would be officially changed.
Foreign ministry officials were not immediately available for comment while a justice ministry spokesman said he was not aware of any moves to change the law.