"Rehman's application for reinstatement was accepted by the ICC's executive board today," ICC president Percy Sonn told reporters after its two-day meeting here.
Rehman, 31 was banned in 1999 by the Pakistan Cricket Board after an internal inquiry implicated him for hobnobbing with illegal bookmakers in fixing international matches.
Three former Test captains, Salim Malik of Pakistan, Mohammad Azharuddin of India and the late Hansie Cronje of South Africa were also banned for life in the match-fixing scandal that hit cricket in the 1990s.
Rehman sought permission from the ICC to play league cricket in England, said Sonn.
An ICC review committee comprising respected television commentator Richie Benaud, British lawyer Michael Beloff and Bangladesh's Ajmal-ul Husain considered Rehman's application and lifted the ban. Sonn added.
"No one doubts that match fixing was and is a scourge which threatens the dignity of cricket, and indeed imperils the game itself," the review committee said in a statement.
"But (the life bans) could have grievous implications for some cricketers. Rehman has already been deprived of exploiting what would have been likely to be the best years of his cricketing life.
"Whatever our verdict he is unlikely ever to resume a Test match career of any kind.
"We note that Rehman was at the time of the offence a young man of 20, that he did not initiate the plan to fix a match and that he was no doubt easily influenced by persons far senior to him in the team.
"He has not, as far as we know, been guilty of any material misbehaviour since 1994. A reduction of the kind we contemplate is not likely to encourage others to fix matches: the deterrent force of a lengthy ban will remain unimpaired.
"While respect rightly continues to be paid to the judgments of sports regulatory bodies as to what are appropriate penalties for offences against sports codes, especially where dishonesty is involved, penalties should be proportionate.
"That is no more severe than is required by the object at which they are directed."
An ICC statement added: "The Executive Board is keen to stress that this decision does not represent a precedent in respect of other banned players and any subsequent applications for reinstatement would be considered on their individual merits."
The Board of Control for Cricket in India has publicly stated in recent weeks that it wants Azharuddin's ban lifted and invited him to attend the opening of its new offices here on Saturday.
Rehman played 13 Tests and 30 one-day internationals between 1992 and 1996, claiming 31 Test and 27 one-day wickets. He last represented Pakistan in a one-dayer against England in Birmingham on August 31, 1996.