"Today I have signed the amnesty law and this law is directed against individuals who have committed minor crimes and who have not yet been apprehended or prosecuted," Allawi said.
The pardon will cover those who have carried out crimes such as possession of weapons and explosives, or who had intended to take part in attacks.
He made it clear, however, that the amnesty did not cover those who had killed other people. Those killers, he said, would be brought to justice.
Adnan al-Janabi, a senior Iraqi official appearing at a news conference with Iyad Allawi, said the amnesty would last for 30 days and could be extended with the approval of Iraq's presidential board.
In the question and answer session after the announcement, the interim prime minister was asked if a state of emergency was necessary in the light of recent armed engagements between Muqtada al-Sadr supporters and Iraq police and US-led forces in Iraq.
Responding, Allawi played down the clashes with al-Sadr's Mahdi Army and said there was no need for an emergency law to manage the fighting in Iraq.
Too much hardship
The law, approved by Allawi's cabinet and set to have been announced last month, will "allow citizens to rejoin civil society ... instead of wasting their lives pointlessly towards a lost cause," he said.
"Our country has gone through too many wars and too much
hardship," he added.
In July, Iraqi President Shaikh Ghazi al-Yawar told the Financial Times the government would offer an amnesty within "a couple of days" to those who had fought US-led forces but were ready to lay down their arms.
US ambassador to Iraq John Negroponte had made a statement last month, urging the interim Iraqi government to exclude those who had killed US soldiers in Iraq from any planned amnesty.
Allawi said on Saturday he had invited Shia Muslim leader al-Sadr to run in elections.
"I invited Moqtada Sadr to participate in elections next year," he said.
Iraq's first democratic election in decades is scheduled to take place by January 2005, when Allawi's US-appointed caretaker government is due to disband.