The former leader is seen as the mastermind behind once intertwined civil wars in Liberia and neighbouring Sierra Leone, where a special UN-backed court wants to try him for supporting brutal rebels in exchange for diamonds.
"President Olusegun Obasanjo has today ... informed President Ellen Johnson-Sirleaf that the government of Liberia is free to take former president Charles Taylor into its custody," the Nigerian government said in a statement on Saturday.
Johnson-Sirleaf, Liberia's first post-war president who took office in January, had asked Nigeria to consider handing over Taylor so he could stand trial at the Sierra Leone court.
Taylor's spokesman in Nigeria said African leaders who brokered the 2003 deal under which Taylor stepped down and went into exile had agreed he could not be handed over to the court.
"African leaders cannot afford to renege on that agreement. They cannot afford to give Western governments a carte blanche to terminate African governments," Sylvester Paasewe said.
"There are many African leaders whose countries have a conflict situation, like Sudan, Uganda, Congo ... They may no longer have faith in an African solution and they may not agree to step down voluntarily as President Taylor did," he said.
Nigeria has once argued that handing Taylor to the court would have violated the deal under which he stepped down. Obasanjo did not want to be seen as having gone back on his word.
Johnson-Sirleaf wants Taylor to
stand trial for his role in wars
"The federal government has insisted that Charles Taylor can only be turned over, on request, to a democratically elected government of Liberia at a time that such a government considers appropriate," the statement said.
"The request of President Ellen Johnson-Sirleaf in her letter of March 5 constituted her determination that the time was opportune."
Taylor's departure was part of a peace deal to end 14 years of civil war in Liberia, which killed 250,000 people, spawned a generation of young armed men and spread violence to nearby states.
In Sierra Leone, Taylor stands accused of supporting rebels notorious for hacking off the limbs of civilians during the 1991-2002 civil war, which cost an estimated 50,000 lives.
The US-based Human Rights Watch welcomed Nigeria's move.
"This is a great day for justice, not only for the victims of Sierra Leone's brutal war but also for the fights against impunity, which has devastated so many lives in West Africa," said Corinne Dufka, head of the group's West African section.