"Iraq is fully back as a member, they have a road map to (federation) elections and they can play football again," FIFA president Sepp Blatter told reporters after an executive committee meeting of football's governing body on Friday.
Iraq were banned in November for the second time in 18 months after the country's Olympic committee disbanded their football association (IFA) and government security forces seized control of the federation headquarters.
The ban came only four months after Iraq staged their first internationals at home since the United States-led invasion of the country in 2003.
FIFA said the suspension was lifted after the IFA's full authority was restored.
Football's ruling body also said Brunei, one of its smallest members, was in trouble after the government refused to recognise the country's football association.
NO PROGRESS
Blatter said no progress had been made since Brunei was suspended in September and the country would be kicked out if nothing changed before the FIFA Congress in June.
"Brunei have not agreed to the road map FIFA and the Asian Football Confederation have proposed to them in order to reinstall the federation and to come back as a member of FIFA," he said.
Blatter added it would be the first time FIFA had expelled a member since 1976 when South Africa was kicked out because of the government's apartheid policies.
Iraq captured the world's imagination by winning the Asian Cup in 2007 but have struggled since.
They have employed a succession of coaches and made an early exit from the 2010 World Cup qualifying competition although they managed a 1-0 win over Australia along the way.
As Asian champions they also earned the right to play in last year's Confederations Cup where they earned goalless draws with New Zealand and South Africa and lost 1-0 to Spain.
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