The U.N. Security Council said Thursday issues stemming from ongoing disputes with Kuwait should be considered under a Chapter VI resolution, rather than a Chapter VII mandate authorizing harsh sanctions or military intervention.
The Security Council said Iraq has now achieved an international standing equal to that of the era before the 1991 Gulf War.
Sanctions were imposed on Iraq in the 1990s when Saddam Hussein violated Kuwaiti sovereignty.
British Minister for the Middle East Alistair Burt said he was "delighted" by the Security Council's decision.
"I hope that this will mark a milestone in the continuing improvement in relations between the two countries, and act as an example of co-operation to resolve difficult and long-standing issues in the region," he said in a statement.
The Security Council's decision followed a report from a U.N. human rights council expressing concern about Iraq's human rights record since U.S. combat forces left the country in 2011.
The report said Iraq has not done enough at home to address violence or national security issues.
U.S. State Department spokesman Patrick Ventrell said the government has made its concerns about ongoing violence "very clear" to its Baghdad counterparts.