Immigration Minister Amanda Vanstone said on Tuesday that 9500 asylum seekers who hold three-year "temporary protection visas", which released them from detention and allowed them to seek work, could now apply for permanent visas.
The majority of those on temporary protection visas are Afghan and Iraqi boatpeople.
The decision follows a string of immigration policy reversals, including a decision to allow 146 Afghans detained on Nauru for more than two years to come to Australia in a winding back of Canberra's so-called Pacific Solution.
The back flips follow an unrelenting campaign by human-rights groups, refugee activists, some journalists and even government MPs for a softening of the tough policy which helped Prime Minister John Howard win the 2001 election.
"(This) will ensure that Australia's border integrity is maintained, our international obligations to refugees are met, and that those making a significant contribution to the Australian community are able to remain here," Vanstone said in a statement.
Australia accepts 13000 people on refugee and humanitarian grounds each year, but asylum seekers entering illegally are held with illegal workers and visa overstayers in detention centres while their cases are handled, which can take years.
In 1999, in response to a surge in illegal immigrants arriving by boat, the conservative government created "temporary protection visas" for those who proved they were eligible for protection under the United Nations Refugees Convention.
Those entering Australia illegally
risked detention in the outbacks
Vanstone said many "temporary protection visa" holders were now working in rural areas in jobs usually hard to fill.
Prime Minister John Howard, criticised for sealing borders to asylum seekers arriving by boat, denied the new plans softened the government's hard line on illegal immigration that helped it retain power at the last election in November 2001.
Only three boatloads of would-be refugees have reached Australian waters since the conservative government began deploying the navy to intercept and divert boats to nearby Pacific islands three years ago.
A total of 865 asylum seekers remain in detention centres.