Jordan announced on Monday that its ambassador to Israel would return to his post in Tel Aviv three months after being recalled over "violations" at Jerusalem's Al-Aqsa mosque.
"We have asked Ambassador Walid Obeidat to return to Tel Aviv," government spokesman Mohammad al-Momani told AFP.
Israeli Prime Minister Benjamin Netanyahu welcomed the announcement in a statement issued by his office.
"This is an important step which reflects the common interests of Israel and Jordan, above all stability, security and peace," Netanyahu said.
Amman recalled Obeidat on November 5 after police clashed with stone-throwing Palestinians inside the flashpoint Al-Aqsa compound, with Foreign Minister Nasser Judeh describing Israeli actions as "violations" and "way beyond the limits".
Momani, who is also minister of state for information, said the decision to return Obeidat to Israel comes after the government "felt that the situation (at Al-Aqsa) is in the right direction".
Obeidat's recall had put enormous pressure on already frosty ties between Israel and Jordan, the only Arab country apart from Egypt to have a peace treaty with the Jewish state.
Tensions soared to a new level in early November when Israeli police entered several metres (yards) inside Al-Aqsa mosque during clashes triggered by a vow by Jewish far-right groups to visit the holy site.
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The compound, holy to both Muslims and Jews, is one of the most sensitive spots in the Middle East.
Jordan, where almost half the population of seven million is of Palestinian origin, has historical custodianship over the flashpoint site and other Muslim holy sites in Jerusalem.
Amman is also seen as a key player in Israeli-Palestinian peace talks, and King Abdullah II has repeatedly called on Israel to end "its unilateral action and repeated attacks" against Jerusalem's holy sites.
After Obeidat was recalled, Netanyahu made a rare visit to Jordan for tripartite talks with Abdullah and US Secretary of State John Kerry to contain the diplomatic fallout.
Momani said Jordan's decision to return its envoy to Tel Aviv also comes after Amman noted that Israel has been allowing more Muslim worshippers to pray at Al-Aqsa after having set limits.
"Israel has received the message that holy sites in Jerusalem are a red line," a government official told AFP, speaking on condition of anonymity.
Obeidat, a career diplomat, first went to Tel Aviv in October 2012, filling a position that had been vacant since mid-2010 when his predecessor was named to a cabinet post in Amman.
Despite pressure from main aid donor the United States, Jordan was reluctant to fill the position because of what officials at the time said was Israeli policies towards the conflict with the Palestinians.
Obeidat's appointment in September 2012 had angered his tribe, one of the largest in Jordan, as well as the Muslim Brotherhood, the country's main opposition group.