President Barack Obama eased investment sanctions on Myanmar and named the first US ambassador to the country in 22 years, seeking to reward an easing of "iron fist" rule.
But Obama, seeking maximum leverage on Myanmar's nominally civilian government and to preserve his options in case of "backsliding," maintained wider US sanctions on Myanmar and figures linked to the former junta.
"As an iron fist has unclenched in Burma, we have extended our hand, and are entering a new phase in our engagement on behalf of a more democratic and prosperous future for the Burmese people," Obama said in a statement.
The US government will now license certain types of investment in financial services and allow US businesses to work in Myanmar, though will ensure that those who abuse human rights and seek to slow progress do not benefit.
"It is a recognition of progress, it is a recognition that opening up greater economic engagement between our two countries is important to support reformers," a US official said, speaking on condition of anonymity.
Obama also said however that current sanctions law would stay on the books to encourage further reform and to allow a speedy reimposition of tough measures if needed.
Secretary of State Hillary Clinton, who made a historic trip to Myanmar in December, also pressed the authorities to release more political prisoners, after meeting Myanmar Foreign Minister Wunna Maung Lwin.
The US decision could usher in the first major trade and investment between the United States and Myanmar for years, and help pry open a backward economy left behind by speeding Southeast Asian development.
The US government will maintain restrictions on investment with the military, which has deep commercial interests in the country's economy.
"What we are doing is easing on society at large and carefully looking to target what we call the spoilers, the bad actors within the system," said another senior US official.
Obama also nominated Derek Mitchell, who has been serving as the State Department's special representative to Myanmar, as US ambassador, pending confirmation by the US Senate.
Washington withdrew its ambassador to Myanmar, also known as Burma, after a crackdown on a democracy uprising in 1988 and elections won by Suu Kyi's democracy movement in 1990 that were never recognized by the junta.
"Burma has made important strides, but the political opening is nascent, and we continue to have concerns, including remaining political prisoners, ongoing conflict, and serious human rights abuses in ethnic areas," Obama said.
US law currently requires the president to restrict imports from Myanmar, where civilians backed by the military now rule, and bans US investment and export of financial services to the country.
It also blocks property and assets of certain members of the Myanmar ruling class and senior officials linked to the former junta.
A statement from Republican Senate Majority leader Mitch McConnell and his party colleague Senator John McCain pointed to strong bipartisan support for Obama's approach on Capitol Hill.
"Today's announcements strike an appropriate balance between encouraging the process of reform now unfolding in Burma, while maintaining sufficient leverage to continue pressing the Burmese government for additional progress," the two senators said.
They noted the move did not amount to lifting sanctions but was a "conditional suspension" of some measures, and that punishments for those who steal Myanmar's resources and abuse human rights would remain in place.
But Ileana Ros-Lehtinen, the Republican chair of the House Foreign Affairs Committee said Obama was moving prematurely.
"We know so little about the actual impact of political changes made by the ruling junta in the past year," she said.
"Until we see more evidence of change, I am adamantly opposed to rolling back the only leverage that we possess in that country."
The US Campaign for Burma also expressed concern at the US move, saying it sent the wrong message at a time when the Myanmar military was escalating its attacks against the ethnic Kachin minority in northern Myanmar.
President Thein Sein surprised many US observers by initiating political reforms designed to break Myanmar's isolation, and elections saw Suu Kyi's National League for Democracy secure 43 of the 44 seats it contested in parliamentary by-elections in April.
But it remains a minority, with many seats in both chambers reserved for unelected military officials.
Suu Kyi, spoke to a gathering in Washington this week and said that although she was not opposed to a freezing of sanctions, people should not be "too optimistic" about developments in Myanmar.