It was not clear how Pakistan's authorities wwould react to a return by Sharif, the latest political heavyweight to enter the parliamentary elections.
The former leader was ousted by general Pervez Musharraf, the country's military ruler, in a 1999 coup, and his past attempt to return led to a quick deportation.
The announcement of his return follows a meeting between Sharif and Saudi King Abdullah in Riyadh on Friday.
Speculation that Saudi Arabia wanted Sharif to go home had been rife since Musharraf made a surprise trip to the Saudi capital for talks with Abdullah on Tuesday.
Pakistani media reported that the Saudi leadership felt that Sharif, who shares the kingdom's religious conservatism, should have the same chance to compete in the vote as Benazir Bhutto, another former prime minister.
Bhutto, a pro-Western woman who leads the other main Pakistani political force, the Pakistan People's Party, returned to Pakistan in October.
A close aide to Musharraf said Sharif would not be sent back to Saudi Arabia, although he provided no further details.
"This time he [Sharif] will not be sent back," said Sheikh Rashid Ahmed, a former cabinet member who remains a close adviser to the general.
If allowed to enter the country, Sharif would arrive in time to meet a Monday deadline for filing nominating papers for the January 8 vote.
Rashid Qureshi, the presidential spokesman, declined to say what Musharraf would do if the man he ousted in 1999 tried to enter Pakistan. When the former prime minister - one of the general's most vehement critics -tried to return home two months ago, he was swiftly deported.
A senior official at the presidency told AP on Friday that Musharraf had
"softened" his stance towards Sharif, and was hoping for some level of reconciliation, raising the possibility that Musharraf might try to ally himself with the man he toppled, in order to freeze Bhutto out.
"The hope is that he (Sharif) will not act like Benazir Bhutto, who is following the politics of confrontation... "
A senior official at the presidency
"The hope is that he [Sharif] will not act like Benazir Bhutto, who is following the politics of confrontation," the official said.
"If he agrees to do it, he will be allowed to return home even before the elections."
The official, who spoke on condition of anonymity because of the sensitive nature of the issue, said close associates of Sharif and Musharraf were in touch to see how they could end their feud.
A law graduate and industrialist's son, Sharif entered politics during the martial law regime of general Zia-ul Haq, Pakistan's previous military ruler, whose patronage propelled him to the post of chief minister of Punjab, the country's dominant province.