Iranian Vice President Muhammad Ali Abtahi told Aljazeera on Tuesday that Iran and Egypt had decided to restore full diplomatic relations, though a minister in Cairo struck a more cautious note.
"The decision to restore relations has been taken," Abtahi said. "And in the coming days, insha Allah (God willing), we will see the resumption of our relations."
An Iranian official earlier told Aljazeera correspondent in Tehran both countries would make an official announcement within the next day or two once certain administrative procedures had been finalised.
The move comes after Tehran's city council passed a resolution, asking for the name of the central Khalid al-Islambuli Avenue to be changed.
The street honoured the man who shot Sadat dead in 1981. A large mural of al-Islambuli, recognised as a "martyr" for his opposition to the Egypt-Israeli peace deal, looks down from a towering building on the busy street.
Sadat was killed in October 1981
after he made peace with Israel
But Egypt sounded a contradictory note of caution, saying no decision had been taken yet on restoring diplomatic relations with Iran.
"Relations between the two countries are on the right track," said Foreign Minister Ahmid Mahir on Tuesday. The minister said the change of the street name was "a positive step but it is not only a matter of renaming a street".
Ties between Cairo and Tehran were severed about 25 years ago after Egypt signed a peace deal with Israel and gave asylum to Iran's deposed shah.
"Relations with Egypt must now be restored, because this will help the Palestinian people, and this is the wish of all Palestinian groups, notably the jihadi groups," said spokesman Hamid Riza Asifi.
Earlier, an Iranian foreign ministry official was quoted by AFP as saying the Palestinian national cause was a major factor in the need for Iran and Egypt to cooperate diplomatically.
Iran says Cairo and Tehran must
cooperate to help the Intifada
The city council noted a decision had already been taken two years ago to rename the street Intifada Avenue, in honour of the Palestinian uprisings.
However, some media have reported the name may honour Muhammad al-Dura, the young Palestinian boy who was filmed being shot dead by Israeli occupation troops in Gaza as he and his father sought cover.
Asifi earlier told the Tehran council of a need for a "positive initiative on the part of the Islamic republic" towards Egypt in light of the "new regional situation, positive signals on the part of the Egyptian leadership and circumstances favourable to the development of bilateral relations".
"We now consider that the conditions have been met" for restoring full diplomatic relations, Asifi said on Tuesday.
Asifi also praised comments by Egypt's foreign minister in which he said the 1978 Camp David peace deal with Israel was "merely a thing of the past".
Relations between the two countries were particularly bad when Egypt supported Iraq during its 1980-1988 war against Iran, but trade and other ties have been improving since the 1990s.