"This morning I have asked the parliament and the Shura Council to amend Article 76 of the constitution, which deals with the election of the president to discuss it and suggest the appropriate amendment to be in line with this stage of our nation's history," Mubarak said on Saturday in a speech broadcast live on Egyptian television.
He said the amendment would be put to a public referendum before the presidential polls, scheduled for September.
"The election of a president will be through direct, secret balloting, giving the chance for political parties to run for the presidential elections and providing guarantees that allow more than one candidate for the people to choose among them with their own will," Mubarak said.
Mubarak was speaking at Menoufia University, 60km north of Cairo.
The audience broke into applause and calls of support, some shouting, "Long live Mubarak, mentor of freedom and democracy!" Others spontaneously recited verses of poetry praising the government.
Mubarak said his initiative came "out of my full conviction of the need to consolidate efforts for more freedom and democracy."
Egyptian television reported that parliament and the consultative Shura Council convened emergency sessions to begin discussing an amendment.
The surprise announcement follows increasing opposition calls for political reforms, including multi-candidate presidential elections.
Currently, Egypt holds presidential referendums in which people vote "yes" or "no" for a single candidate who has been approved by parliament. The legislature has been dominated by Mubarak's ruling party since political parties were restored in the 1970s.
New political arena
Mubarak's proposal heralds positive changes in Egypt, said the head of the Political Science Department at Cairo University, Hasan Naffa.
"This is an important step that will help defuse the political bitterness that has been going on in Egypt lately," he told Aljazeera.net.
Egyptians demonstrate against
the extension of Mubarak's rule
"And this will create a very active political arena in Egypt as political parties will be all fired up to nominate a candidate for the upcoming elections, " he said.
Naffa thinks this is the first step in resolving the contentious issue of presidential elections in Egyptian politics. "When this complex is resolved many other changes will follow," he told Aljazeera.net.
Naffa called the announcement a victory for Egypt's opposition groups.
"This gives a major boost to those who want real reforms in Egypt and not those who are just bending to external US pressure for reform," he said.
Naffa is convinced that the amendment to the constitution will be implemented. "If it doesn't happen, it will make Mubarak's announcement a joke or a charade, and this will create even more political problems."