US Secretary of State Hillary Clinton has announced that Washington will start the process of exchanging ambassadors with Burma.
The announcement came hours after most of the country's political prominent dissidents were released from jail.US President Barack Obama described the move as a "substantial step forward".
The move is seen as one of the key demands of Western nations before international sanctions can be eased. The US stopped short of lifting them.
Mr Obama said he had asked officials to take "additional steps to build confidence" with Burma.
"Much more remains to be done to meet the aspirations of the Burmese people, but the United States is committed to continuing our engagement," he said.
Mrs Clinton said a US ambassador would be identified, but the restoration of ties would be a lengthy process dependent on further reform.
"In consultation with members of Congress, and at the direction of President Obama, we will start the process of exchanging ambassadors with Burma," she said.
"An American ambassador will help strengthen our efforts to support the historic and promising steps that are now unfolding."
There was jubilation as the prisoners were reunited with their families and friends.
Those freed include 1988 student activists, monks involved in 2007 protests and ethnic-minority activists.
But the real test will be how much freedom the released prisoners will have to continue their activities, says BBC South East Asia editor Rachel Harvey.
State TV had announced that 651 prisoners would be freed under a new presidential pardon, but did not say how many would be political.
Burma's government does not recognise political prisoners, saying only that people are jailed for criminal activity.
But in a statement broadcast on TV, President Thein Sein said those released were people who could "play a constructive role in the political process".
Pro-democracy leader Aung San Suu Kyi said the move was a "positive sign".
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