Cabinet decision still needs approval of joint meeting of the contry's sovereign council and cabinet, which serves as its interim legislative body.
Sudan's cabinet has voted to repeal a 1958 law that forbade diplomatic and business relations with Israel, it said in a statement.
"The Council of Ministers has approved a bill (repealing the 1958 boycott of Israel law) for the year 2021," the cabinet said in a statement on Tuesday.
It also emphasised "Sudan's firm position on the establishment of a Palestinian state within the framework of a two-state solution".
The decision still needs the approval of a joint meeting of Sudan's sovereign council and cabinet, which serves as Sudan's interim legislative body.
Sudan last year signed up to the Abraham Accords on regional reconciliation with Israel sponsored by the US administration of then-president Donald Trump, and Israeli officials have visited Sudan.
Changing political landscape
The 1958 law was in line with the policies of Arab nations at the time towards Israel.
Penalties for those who violated its stipulations, such as trading with Israelis, included up to 10 years in jail and a hefty fine.
But the political landscape has changed as Sudan, along with Gulf countries and Morocco, have built bridges with the Jewish state in deals mediated by Trump.
Sudan agreed to normalise ties with Israel in October last year, in a quid pro quo for Washington removing the country from its "state sponsors of terrorism" blacklist months later.
Khartoum maintained a rigid anti-Israel stance during the three-decade rule of former president Omar al Bashir, who was ousted amid mass protests in April 2019.
A post-Bashir transitional government has been pushing for re-integration with the international community and to rebuild the country's economy after decades of US sanctions and internal conflict.
The bill will be presented for final approval from the country's ruling Sovereign Council, made up of military and civilian figures, before it is passed into law.