However, the People's Bank of China said there were no grounds for "large swings" in the currency, suggesting policymakers would maintain their tight grip on the value of the yuan.

US President Barack Obama welcomed the move, saying it would boost global economic recovery from a battering financial crisis.

"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement.

The currency issue has been a constant irritant in relations between the United States and China, with US lawmakers charging that Beijing deliberately undervalues the yuan to give its exports an unfair advantage.

The European Commission welcomed the decision as a boost for the global economy and said "It sends a signal of confidence on the strength of the global recovery."

IMF chief Dominique Strauss-Kahn also hailed it as a "very welcomed" announcement.

Japan praised the move, which Finance Minister Yoshihiko Noda said would help stabilise the Chinese, Asian and global economies and bring balanced growth, Jiji Press news agency reported.

The statement by the central bank was released amid pressure on Beijing to strengthen its currency and comes ahead of next week's G20 meeting in Toronto, where the controversial policy is expected to be on the agenda.

"China's central bank has decided to further promote the reform of the RMB (yuan) exchange rate mechanism, and strengthen the flexibility of the RMB exchange rate," the central bank said on its website.

However, it stressed that there was no basis for large movements or change in the exchange rate and reiterated that it would continue to manage the floating exchange rate "within the band already announced".

Central bank adviser Li Daokui said the statement marked an end to the fixed exchange rate but added he had no idea when the trading band would be widened, Dow Jones Newswires reported.

The move to increase the flexibility of the exchange rate was China's own decision and had no direct connection with the G20 summit, said Li, a member of the central bank's monetary policy committee.

Analysts said the statement suggested the government was moving away from the financial crisis exchange rate policy of effectively freezing the yuan against the dollar, which critics say gives China's exports an unfair trade advantage.

"I think they are saying this is the basic end of the de facto peg and they will be moving back to the 2005 system and this will mean gradual appreciation over time," said a Beijing-based analyst who declined to be named.

Morgan Stanley economist Wang Qing said the move to exit the dollar-peg was a "switch to the pre-crisis regime".

Export-driven China has effectively pegged the yuan to around 6.8 to the dollar since July 2008 to support manufacturers battered by the financial crisis and preserve jobs in a sector that employs tens of millions of people.

In 2005, China made its currency slightly more flexible and allowed the yuan to appreciate about 20 percent against the dollar until July 2008.

"Today's decision should pave the way for gradual appreciation of the yuan against the dollar over the rest of the year," said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.

The bank said that given the gradual recovery in the global economy and greater stability in China, it was "desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility."

Facing election-year pressure, US lawmakers from both sides of the political aisle have vowed to launch legislative action within weeks to punish China over its currency policy.

Beijing has defended its stance as necessary to help exporters even as the world's third largest economy grew a blistering 11.9 percent in the first quarter and demand for Chinese-made products rebounded.

Speculation had been growing in recent months that Beijing may soon let the yuan appreciate, with a number of central bank officials hinting that a change in the exchange rate policy could be in the offing.

In March, People's Bank of China governor Zhou Xiaochuan said the exchange rate policy was temporary and would be scrapped "sooner or later" along with other crisis-measures.

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