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Government ministries are to prepare reports within 30 days and the order will be implemented by June 2018, the Saudi Press Agency reported.
Saudi Arabia is the only country in the world to forbid women from driving.
Under the current system, only men are allowed driving licences and women who drive in public risk being arrested and fined.
Because of the law, many families have had to employ private drivers to help transport female relatives.
Rights groups in the kingdom have campaigned for years to allow women to drive, and some women have been imprisoned for defying the rule.
"The royal decree will implement the provisions of traffic regulations, including the issuance of driving licences for men and women alike," the Saudi Press Agency (SPA) said.
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The country's US ambassador, Prince Khaled bin Salman, said it was "an historic and big day" and "the right decision at the right time".
He confirmed that women will not have to get permission from their male guardians to take driving lessons, and would be able to drive anywhere they liked.
What was the reaction?
The move was welcomed by the US state department, which called it "a great step in the right direction".
UN Secretary General Antonio Guterres echoed that sentiment.
Saudi activist Loujain al-Hathloul, who was detained for 73 days in 2017 for flouting the ban, tweeted "thank God" following the announcement.
Manal al-Sharif, an organiser of the Women2Drive campaign who has also been imprisoned for driving, said on Twitter that Saudi Arabia would "never be the same again".
Activist Sahar Nassif in Jeddah told the BBC she was "very, very excited - jumping up and down and laughing".
"I'm going to buy my dream car, a convertible Mustang, and it's going to be black and yellow," she said.
The hashtags "I am my own guardian" and "Saudi Women Can Drive" quickly gained traction on social media.
Not everyone reacted positively, however, with conservative voices accusing the government of "bending the verses of Sharia".
"As far as I remember, Sharia scholars have said it was haram (forbidden) for women to drive. How come it has suddenly become halal (permissible)?" one critic tweeted.
Others emphasised that despite the latest development, Saudi Arabia remains a long way off gender equality.
Analysis: A massive change for Saudi society
By Frank Gardner, BBC security correspondent
This decree is huge for Saudi Arabia. For decades now, Saudi women, many of whom are extremely well-educated and ambitious, have been waiting for their chance to participate fully in their country's economy.
For all this time families have had to stretch their budgets to the limit, as they have had to hire in imported chauffeurs from south and south-east Asia, house them, feed them and insure them.
An estimated 800,000 imported chauffeurs currently ferry Saudi women around. The reason it has taken so long is the long-standing opposition from religious conservatives, who have expressed views varying from "they are too stupid to drive" to "it will lead to intolerable mingling of the sexes".
Yet this decree is in line with a programme called Vision 2030, promoted by Saudi Crown Prince Mohammed Bin Salman, to modernise Saudi society and bring it more into line with the rest of the world.
Lifestyle limits for Saudi women
Saudi law enforces a strict form of Sunni Islam known as Wahhabism and is known for its gender segregation rules.
Women have to adhere to strict dress codes, must not associate with unrelated men, and if they want to travel, work or access healthcare they must be accompanied by - or receive written permission from - a male guardian.
The Islamic kingdom recently faced a backlash from conservatives on social media after allowing women to participate in Saturday's National Day celebrations for the first time.
The festivities included fireworks, light shows and a concert in King Fahd International Stadium in the capital, Riyadh.
[BBC SOURCES]
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