Burma has been working towards economic normalisation as it opens up relations with the world
The European Union has lifted the last of its trade, economic and individual sanctions against Burma in response to its political reform programme.
The sanctions were temporarily lifted last year, and opposition leader Aung San Suu Kyi agreed Burma's progress merited the move being made permanent.
An EU foreign ministers' meeting said an arms embargo would stay in place.
It warned Burma needed to address "significant challenges", particular regarding its minority Muslims.
Human rights groups say the lifting of sanctions reduces the leverage the EU has on Burma, with Human Rights Watch's Asia head Phil Robertson describing the move as "premature and regrettable".
It came shortly after the BBC obtained police video showing officers standing by while Buddhist rioters attacked minority Muslims in the Burmese town of Meiktila. It was filmed last month, when at least 43 people were killed in Meiktila.
An EU statement, approved without a vote and issued at a foreign ministers' meeting in Luxembourg, said: "In response to the changes that have taken place and in the expectation that they will continue, the Council (of ministers) has decided to lift all sanctions with the exception of the embargo on arms."
The decision came in response to political reforms implemented by President Thein Sein, who came to power after elections in November 2010. His administration has freed many political prisoners and relaxed censorship.
British Foreign Secretary William Hague said Burma's political progress was substantial enough and serious enough for the temporary lifting of sanctions to be made permanent.
But he told the BBC: "The work of the EU in Burma is not remotely finished. It is important to continue working on improving human rights, on improving the humanitarian situation, in helping the Burmese to address issues of ethnic violence, particularly attacks on Muslim communities."
Aung San Suu Kyi, who for years supported the sanctions against the country's military rulers, backed the EU's decision, telling the BBC the democracy movement could not depend on sanctions forever.
"It is time we let these sanctions go," she said. "I don't want to rely on external factors forever to bring about national reconciliation which is the key to progress in our country."
Ms Suu Kyi, who was under house arrest for many years, leads a pro-democracy opposition which has a small presence in parliament.