US officials said on Friday that the Bush administration had decided to delay imposing sanctions on Saudi Arabia for six months.
This is the first time Washington has waived punishing a blacklisted country under a 1998 law targeting violators of religious rights.
The decision reflects the delicate balance the US has sought to strike with Arab allies such as Saudi Arabia as it promotes expanding freedoms at the risk of irking governments needed to support its oil and counter-terrorism policies.
In a rare official rebuke a year ago, Washington designated Saudi Arabia as one of only eight countries worldwide that could be sanctioned.
The blacklisting in an annual report said religious freedom did not exist in the kingdom.
With this year's report due out next month, the Bush administration needed to decide on sanctioning Saudi Arabia and chose to give the kingdom a further six months to negotiate how it might improve its record.
"We have not seen strong progress in the area of legal protection for religious freedom," State Department spokesman Kurtis Cooper said. "[But] we welcome Saudi recognition of the need to make improvements and create a more tolerant society."
With high oil prices affecting the US economy and dragging on President George Bush's popularity, Democrats have charged he has largely ignored Saudi Arabia's rights record for fear of causing any backlash from the oil supplier.
"We have not seen strong progress in the area of legal protection for religious freedom... [But] we welcome Saudi recognition of the need to make improvements and create a more tolerant society"
Kurtis Cooper, spokesman,
US State Department
Prominent Saudis dismiss as politically motivated US criticism of the country's strict Wahhabi brand of Islam.
In contrast to its decision on Saudi Arabia, the US decided to sanction Eritrea by banning military exports to the Horn of Africa country, the officials said.
Vietnam, the third country added to the blacklist last year, has avoided sanctions after agreeing to improve its record, they added.
The other countries the US considers serious violators of religious freedom are North Korea, Myanmar, Sudan, Iran and China.
The United States Commission on International Religious Freedom, an agency established by Congress to promote religious freedom, has recommended this year that three allies should be added to the blacklist: Pakistan, Uzbekistan and Turkmenistan.