The announcement came from the White House on Tuesday shortly after President George Bush said that Canada would also be able to bid for an estimated $18.6 billion worth of contracts.
The previous US position was that only those countries whose troops were also occupying Iraq would be eligible for bidding on the projects, although US officials had signalled some flexibility after an international outcry.
Appearing with new Canadian Prime Minister Paul Martin, Bush said he told Martin that Canadian firms would be eligible to bid on major projects when a second round is awarded.
Martin welcomed the change, describing the change as "quite significant".
They were speaking on the sidelines of the Summit of the Americas in Mexico.
The second round of contracts is expected to include about $6 billion in non-construction work to rebuild Iraq, likely including equipment, democracy-building projects and grants. Bidding should begin in a few weeks.
Last week, bidding began on about $5 billion in major construction contracts.
Iraq's reconstruction efforts are
worth some $18.6 billion
Bush had effectively punished war opponents like Canada, France, Germany and Russia a month ago by banning them from bidding on lucrative reconstruction projects for Iraq.
At the time he said: "Our people risked their lives. Friendly coalition folks risked their lives and ... the contracting is going to reflect that."
The shift followed an acknowledgment by US officials that they would like to put the bitter Iraq war debate in the past and patch up relations with key allies.
The contracts controversy exploded just as presidential envoy James Baker was departing on a mission to gain European support for forgiving some of Iraq's $120 billion in foreign debt. France and Germany pledged substantial debt relief.
Canada was angered by the fact it has contributed $240 million C$300 million to reconstruction efforts in Iraq and sent 2000 soldiers to Afghanistan.