|Pakistan's foreign minister Hina Rabbani Khar, right, met her Indian counterpart SM Krishna in July for talks [EPA]
The Pakistani government has decided to award "most favoured nation" trading status to India.
Wednesday's decision would enable Pakistan to export more goods to booming India at a time when its own economy is in the doldrums.
Some Pakistani business quarters welcomed the decision, but others expressed concerns about cheaper Indian goods flooding the market.
The World Bank estimates that annual trade between India and Pakistan is $1bn and could grow to as much as $9bn if barriers are lifted.
India extended most favoured nation status to Pakistan in 1996.
Firdous Ashiq Awan, the Pakistani information minister, did not say when the new rules would take affect, but said that the country's powerful military, which often dictates policy on India, agreed with the decision.
Minister Anand Sharma, India's commerce and industry minister, welcomed the Pakistani decision, telling reporters "we deeply appreciate this positive gesture that Pakistan has taken".
Pakistan and India have fought three wars since they were carved off from each other in 1947, with the disputed status of Kashmir the main flashpoint.
Granting a country most favoured nation status means that countries trade on equal and improved terms, typically giving each other low tariffs and high import quotas.
The decision to normalise trade appears to reflect a slight relaxing of Islamabad's attitude toward New Delhi.