Scrapping the embargo will help Vietnam defend against China, as Beijing intensifies a military build-up throughout the South China Sea.
US President Barack Obama announced a rollback of a Cold War-era ban on sales of lethal arms to Vietnam on Monday – a move that could improve its former enemy's defence capability amid rising tensions with China over the South China Sea.
During a joint press conference alongside his Vietnamese counterpart President Tran Dai Quang, Obama said, "The United States is fully lifting the ban on the sale of military equipment to Vietnam that has been in place for some fifty years."
The White House defined Obama's 3-day visit as a step forward in refocusing US attention towards Asia.
The long awaited lifting of the embargo would help Vietnam boost its military defence against China as Shanghai pursues a military build-up throughout the South China Sea.
The US has long criticised Vietnam over human rights violations and restrictions on freedom of speech and the decision to improve ties suggests concern over China's growing assertiveness outweighs disagreement in such areas.
However, Obama stated that the improvement in diplomatic relations with Hanoi was not linked to China.
"The decision to lift the ban was not based on China... but on our desire to complete what has been a lengthy process moving towards normalization with Vietnam."
Following Obama's announcement, Beijing said it hopes the restoration of ties between the two countries will be conducive to regional peace and stability.
China claims sovereignty over almost all of the energy-rich South China Sea, through which more than $5 trillion of maritime trade passes each year.
The Philippines, Brunei, Vietnam, Malaysia and Taiwan have overlapping claims.