The decree is slated to take effect from June 2018.
The announcement was reported late Tuesday by the state-run Saudi Press Agency and state TV. Praise for the move poured in from inside the Saudi kingdom as well as abroad.
Until now, only men were issues licences and women who drove in public risked being arrested and fined.
Manal al-Sharif, an organiser of the Women2Drive campaign who was earlier imprisoned for driving, said on Twitter that Saudi Arabia would "never be the same again", reports the BBC.
The hashtags "I am my own guardian" and "Saudi Women Can Drive" quickly gained traction on social media.
US President Donald Trump said it was a positive step towards promoting women's rights. US State Department spokeswoman Heather Nauert called the move "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 2014 for flouting the ban, tweeted "thank God".
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