The Palestinian Authority is due to receive tax revenue funds withheld by Israel since Palestinian factions agreed a unity deal earlier this month, according to Israeli officials.
Approximately $86m in tax and customs revenues from ports and border was held after Fatah and Hamas agreed the deal. Israel justified the freeze on the grounds that some of the money would go to Hamas, which it considers a terrorist organisation.
The money adds up to about a third of the PA's budget, and the freeze meant Palestinian government workers had gone without salaries .
Monday's announcement came after a weekend of deadly clashes on the 63rd anniversary of the founding of Israel in 1948, dubbed the 'catastrophe' or 'Nakba' by Palestinians.
The freeze was originally justified by Israel's finance minister, Yuval Steinitz, who had suggested that "communal fund would finance the terrorist activities of Hamas, and we want it established that there will be two separate funds", although a separate fund was not created.
On Monday, Israeli strategic affairs minister Moshe Yaalon explained: "We have unblocked the funds because we have established that the agreement between Fatah and Hamas has had no effect."
But Yaalon, also a member of Israel's security cabinet, said the freeze could happen again.
"We will continue to verify that the money is not going into the accounts of terrorist organisations. If we believe that is the case, we will stop the transfers again," he said.
The freeze was widely criticised, drawing objections from UN secretary general Ban Ki-moon and European leaders, as well as some members of Israel's government, who called it a violation of the 1994 Paris accords, which require Palestinian tax and custom revenues to be handed over.
Fatah and Hamas delegations are to meet in Cairo on Monday to discuss the formation of a new government, a senior Egyptian official said, quoted by Egypt's MENA news agency.
The two factions are to "put in place a mechanism for immediate reconciliation, in particular the formation of a government of independent Palestinians," he said.
"Egypt will help the two sides come to an agreement," over the choice of prime minister and the composition of the cabinet, the unnamed official said.