The move follows a request from Nuri al-Maliki, Iraq's prime minister, a military spokesman said on Tuesday.
Iraqi and US troops have for the past week been manning checkpoints and mounting raids in Sadr City, a stronghold of the Mahdi Army of Shia leader Muqtada al-Sadr.
Earlier, a statement from al-Maliki's office said: "The commander-in-chief, prime minister Nuri al-Maliki, has ordered the lifting of all barriers and checkpoints to open roads and ease traffic in al-Sadr City and other districts of Baghdad."
All checkpoints should be removed by 5pm (1400 GMT) on Tuesday, it said.
The order appeared to be a step by al-Maliki to assert his authority at time of tension between him and the United States.
The checkpoints had initially been installed by the US army as it hunted for an American soldier of Iraqi origin abducted in central Baghdad last week.
A local cleric loyal to al-Sadr ordered protests at what he called a US military "siege" of the sprawling slum.
Al-Sadr is a member in the Shia bloc that dominates Iraq's government.
He is the leader of the Mahdi Army which is an Iraqi nationwide movement that controls police and much else in Sadr City, and is blamed by the US military and minority Sunni leaders for kidnappings and death squad killings.
An abortive US raid against an alleged death squad leader in Sadr City that killed 10 people last week increased tensions between Al-Sadr and Al-Maliki.
Al-Sadr's movement is
represented in the parliament
It was also caused friction between his government and Washington, which wants him to disband militias like the Mahdi Army, whose political leaders underpin his parliamentary majority.
In a statement addressed to local supporters on Monday, al-Sadr warned of unspecified action if the military's "siege" continued.
"If this siege continues for long, we will resort to actions which I will have no choice but to take, God willing, and when the time is right," he said in the statement.
He also criticised what he called the silence of politicians over actions by the US military in Sadr city, home to about 2.5 million people.