US President Joe Biden's administration is moving to revoke the designation of Yemen's Houthis as a terrorist group, citing the need to mitigate one of the world's worst humanitarian disasters.
Former president Donald Trump's administration branded the Iranian-backed Houthis as a foreign terrorist organisation.
This move limited the provision of aid to the Yemeni people, who have suffered six years of civil war.
A State Department representative said on Friday they had "formally notified Congress" of Secretary of State Antony Blinken's intent to revoke the designation.
"This decision has nothing to do with our view of the Houthis and their reprehensible conduct, including attacks against civilians and the kidnapping of American citizens," the representative said.
"Our action is due entirely to the humanitarian consequences of this last-minute designation from the prior administration."
The representative said the US remained committed to helping Saudi Arabia defend its territory against attacks by the rebels.
Mr Blinken's predecessor, Mike Pompeo, announced the designation days before leaving office last month, pointing to the Houthis' links to Iran and a deadly attack on the airport in Yemen's second city of Aden in December.
Aid groups said they have no choice but to deal with the Houthis, who control much of Yemen, and that the terrorist designation would put them at risk of prosecution in the US.
According to the UN, more than three million people have been displaced and close to 80 per cent of Yemen's population of 29 million people need of some form of aid for survival.
The move came a day after Mr Biden announced an end to US support for offensive operations in a Saudi-led campaign against the Houthis.
The Obama administration in 2015 gave its approval to Saudi Arabia leading a cross-border air campaign targeting the Houthi rebels, who were seizing more territory after taking the capital, Sanaa.
The Houthis have launched numerous drone and missile strikes deep into Saudi Arabia.
Democratic Senator Chris Murphy praised the Biden administration's move.
“The designation did not impact the Houthis in any practical way, but it stopped food and other critical aid from being delivered inside Yemen and would have prevented effective political negotiation," he said.