Ali Lamy, head of the Supreme National Council for De-Baathification, said the proposed reform could reverse the sacking of more than a million former Baath Party activists, mainly members of Iraq's Sunni minority.
"A draft law has been prepared that goes in line with the project of national reconciliation released by the prime minister," he told AFP.
"This draft will help those who were Baathists to return to their posts or get pensions," he said.
The reform could allow many thousands of former ruling party members to return to work.
While most rank-and-file Baathists would be allowed back into the jobs once considered theirs by right under Saddam's one-party state, the top 1,500 party cadres considered complicit in his crimes will remain excluded.
"The law will allow Baathists to return to their offices but not allow them the ideology of the banned Baath Party," he warned.
"We consider those who insist on remaining in the Baath Party to be terrorist elements." Prime Minister Nuri Maliki's government has been under pressure from its US allies to revise de-Baathification laws in order to encourage Sunni parties to take a full part in a peace process designed to reconcile Iraq's factions.
US Ambassador Zalmay Khalilzad has described this reform as one of the "benchmarks" that Washington has urged on Maliki in place of the "timetable" for peace which President George W. Bush's critics have demanded.
The latest step could also be seen as a step to appease the country's Sunni minority after their former leader Saddam was sentenced to death by the Iraqi High Tribunal on Sunday.
Saddam and three other of his former regime officials were sentenced to death by hanging for killing 148 Shiites in the village of Dujail in the 1980s.
Meanwhile, the United States' pushing for the reform of the anti-Baath law is one of the ironies of Iraq's current crisis, as it was Iraq's former US administrator who first insisted on the ban.
The Supreme National Council for De-Baathification was founded in May 2003 as one of the first acts of the then US administrator for Iraq, Paul Bremer, as part of his controversial strategy of expelling Saddam supporters from public life.
It was initially led by Ahmed Chalabi, a formerly exiled Iraqi politician who was then still the darling of Pentagon war planners who thought he might be able to set up a liberal, secular and democratic regime in Baghdad.
Chalabi sacked 30,000 civil servants, marking a clear end to the Baath Party's dominance of Iraqi government, but also stripping the war-torn country of some of its ablest administrators.
Some 12,000 of the sacked have since returned to public service after "re-education", while Chalabi has lost US support amid allegations that he is too close to Iran and lied about Iraq's alleged weapons programmes.