Ms Mowlam said the ban on the LVF paramilitary force - founded by Billy Wright who was shot dead in the Maze jail by the republican Irish National Liberation Army (INLA) - was lifted on the basis of security information.
Ms Mowlam said it was too soon to lift the banning orders on three other republican groups: the Continuity IRA, which has not declared a ceasefire; the Real IRA, which was responsible for the Omagh bomb massacre and the INLA. They have both declared ceasefires.
The LVF was involved in a spate of tit-for-tat killings last January, sparked by the shooting of Billy Wright, when six Catholics were murdered.
Ms Mowlam said: "I am now satisfied that they have established a complete and unequivocal ceasefire and over a significant period of time, since May 1998, they have demonstrated that that ceasefire is being maintained."
She said the lifting of the ban also recognised the significant contacts that the LVF had made, via an unnamed intermediary, with the body set up to handle decommissioning of terrorist weapons in Ulster.
The lifting of the ban, which has to be approved by Parliament, was given the support of the Tories. But Andrew Mackay, Tory spokesman on Northern Ireland, urged the LVF to show a lead by fulfilling its promise by decommissioning its weapons. He also called on the Prime Minister to halt the release of prisoners under the Good Friday Agreement until decommissioning began.