Israel is to stop withholding tax revenues collected on behalf of the Palestinian Authority (PA), a move that has crippled the Palestinian economy.
Prime Minister Benjamin Netanyahu said the “deteriorating situation in the Middle East” and rise of extremists required him to “act responsibly”.
Israel’s military had reportedly warned that the policy was fuelling violence.
Mr Netanyahu halted payments in January in protest at the Palestinians joining the International Criminal Court (ICC).
When their membership takes effect on 1 April, the Palestinians will be able to pursue Israel for alleged war crimes.
On Friday, the Israeli prime minister’s office announced that Mr Netanyahu had approved the resumption of monthly transfers of 500m shekels ($126m; £85m) in tax revenues.
“Tax revenues accumulated through February will be transferred, after payments for services to the Palestinian population have been deducted, including electricity, water and hospital bills,” a statement said.
The decision to release the funds was based on “humanitarian concerns and in overall consideration of Israel’s interests at this time”, it added.
“Given the deteriorating situation in the Middle East, one must act responsibly and with due consideration alongside a determined struggle against extremist elements,” Mr Netanyahu was quoted as saying.
Defence Minister Moshe Yaalon, the Israeli military and the Shin Bet domestic security service all recommended the move.
It did not give their reasons, but Israeli media reported earlier this week that military commanders had said the policy was fuelling violence in the occupied West Bank.
The decision to freeze the tax transfers to the PA, which provide two-thirds of its income, forced it to cut by 40% the salaries of thousands of government employees and announce an emergency budget.
On Wednesday, the governor of the Palestinian central bank said the tax transfer freeze was leading to a rapid economic deterioration and leaving the banking system dangerously exposed.
Israel has suspended the transfers on three occasions in the past decade, but in January the Palestinian economy was already struggling, with the deficit at around 15% of GDP, unemployment at 25%, output set to contract, and donors not fulfilling funding commitments.
Friday’s announcement also comes after Mr Netanyahu was re-elected.
The prime minister was criticised by the Palestinians and the US for vowing on the eve of last week’s polls not to allow an independent Palestinian state. He has since insisted that he was not rejecting a two-state solution outright, but that he believed it was impossible right now.