In a statement on Thursday, the Serbian government said the decision to recognise Montenegro as an independent state followed the declaration of independence by the Montenegrin parliament earlier this month.
"Conditions have been created for the government of Serbia ... to recognise the Republic of Montenegro and establish diplomatic ties," which would "help contribute to developing friendly and good neighborly relations," the Serbian government said in a statement.
In Podgorica, the Montenegrin leaders hailed the Serbian government decision.
Montenegro declared independence from Serbia on June 3, after its citizens supported the split by a small margin at a May 21 referendum.
The split of the Serbia-Montenegro union marked the formal end of what was left of Yugoslavia. Slovenia, Croatia, Bosnia and Macedonia had left the union earlier.
The two nations joined in a Balkan union in 1918.