In a royal decree signed by King Salman bin Abdulaziz Al Saud, the order said it will be effective immediately but the rollout will take months, the Saudi Press Agency reported on Tuesday.
A high-level committee of ministers has been set up to examine the arrangements for the enforcement of the order.
The committee will take up the recommendations within 30 days from the date of the decree, and will be implemented between 23 and 24 of June 2018, based on the Islamic calendar.
The decree said that women would be allowed to drive "in accordance with the Islamic laws".The announcement follows a gender-mixed celebration of Saudi National Day over the weekend, the first of its kind, which aimed to spotlight the kingdom's reform push, analysts said, despite a backlash from religious conservatives.
Women were also allowed into a sports stadium - previously a male-only arena - to watch a musical concert, a move that chimes with the government's "Vision 2030" plan for social and economic reform as the kingdom prepares for a post-oil era.
Saudi Arabia is the only country in the world which does not allow women to drive.
While there have been restrictions imposed on women drivers, some female activists have defied the ban leading to their arrests.
Women drivers have previously been arrested and cars have been confiscated, activists said.
In 2016, Alwaleed bin Talal, an influential Saudi prince called for an "urgent" end to the ban, saying it is a matter not just of rights but economic necessity."Preventing a woman from driving a car is today an issue of rights similar to the one that forbade her from receiving an education or having an independent identity," Alwaleed said.
"They are all unjust acts by a traditional society, far more restrictive than what is lawfully allowed by the precepts of religion."
He also detailed the "economic costs" of women having to rely on private drivers or taxis, since public transit is not a viable alternative in the kingdom.
Using foreign drivers drains billions of dollars from the Saudi economy, Alwaleed said.
He calculated that families spend an average of $1,000 a month on a driver, money that otherwise could help household income at a time when many are making do with less."Having women drive has become an urgent social demand predicated upon current economic circumstances," said the prince.
A slow expansion of women's rights began under the late king, Abdullah bin Abdulaziz, who in 2013 named some women to the Shura Council, which advises the cabinet.
Abdullah also announced that women could for the first time vote and run in municipal elections.
The gambit to loosen social restrictions, which had so far not translated into more political and civil rights, seeks to push criticism over a recent political crackdown out of the public eye, some observers said.
Saudi Arabia has some of the world's tightest restrictions on women, despite ambitious government reforms aimed at boosting female employment.
Under the country's guardianship system, a male family member - normally the father, husband or brother - must grant permission for a woman's study, travel and other activities.
But Saudi Arabia appears to be relaxing some norms as part of the Vision 2030 reform plan.