All Gurkha veterans who retired before 1997 with at least four years' service will be allowed to settle in the UK, Home Secretary Jacqui Smith has said.
Ms Smith told MPs she was "proud to offer this country's welcome to all who have served in the brigade of Gurkhas".
It comes after a high-profile campaign by Joanna Lumley and other supporters of Gurkha rights - and an embarrassing Commons defeat for the government.
Some 36,000 Gurkhas who left before 1997 had been denied UK residency.
Gurkhas, who are recruited from Nepal, have been part of the British Army for almost 200 years.
He said it was a shame that the government had had to be dragged "kicking and screaming" to the decision.
Ms Smith said she expected to welcome 10,000 to 15,000 applications from Gurkhas over the next two years.
She added that some 1,400 outstanding applications for settlement currently before the UK Border Agency would be processed on the basis of the new policy "as a matter of urgency" before 11 June.
Ms Smith added that the Gurkhas had served the UK "with great courage, sacrifice and distinction and they continue to make a vital and valued contribution to our operations around the world".
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