The US is to exchange ambassadors with Burma in response to its freeing political prisoners and other reforms.
Secretary of State Hillary Clinton announced the move after Burma president Thein Sein issued a pardon and freed 651 detainees, who included some of its most famous political inmates.
In a statement, President Barack Obama described the pardons as "a substantial step forward for democratic reform".
The US decision follows a landmark visit by Clinton to the repressive country in December as a way of deepening engagement and encouraging more openness there.
As the Obama administration looks to step up US involvement across the Asia-Pacific region, it has shifted from Washington's long-standing policy of isolating Burma's military government because of its poor human rights record.
"As I said last December, the United States will meet action with action. Based on the steps taken so far, we will now begin," Mrs Clinton said at the State Department.
The highest level US diplomat based in Burma, has been a charge d'affaires. Washington downgraded its representation in 1990, when opposition leader Aung San Suu Kyi's party swept elections but was barred from power by the military.
Burma's own diplomatic representation in Washington also currently is a step below the level of ambassador.
Mrs Clinton said the US would identify further steps it could take to support reforms, but gave no specifics. Among the other recent moves by the government that she commended was its reaching a ceasefire with the Karen National Union, stopping a long-running ethnic insurgency.