Many Sephardic Jews were killed, forced to convert to Christianity or leave at the end of the 15th Century.
Parliament paved the way for a change in citizenship laws two years ago, but the move needed Cabinet approval.
From now on, descendants of Sephardic Jews who can prove a strong link to Portugal can apply for a passport.
Proof can be brought, the government says, through a combination of surname, language spoken in the family or evidence of direct descent.
Thousands of Sephardic Jews were forced off the Iberian peninsula, first from Spain and then from Portugal.
Some of those who fled to other parts of Europe or to America continued to speak a form of Portuguese in their new communities.
The Portuguese government acknowledges that Jews lived in the region long before the Portuguese kingdom was founded in the 12th Century.
"There is no possibility to amend what was done," says Portuguese Justice Minister Paula Teixera da Cruz, adding that the law change was "an attribution of a right".
Portugal's Jewish community which once numbered in the tens of thousands has shrunk to just 1,000 - most of them Ashkenazim with roots in Eastern Europe.
Neighbouring Spain is still debating a similar law to address its treatment of Jews in the past.
The Portuguese Cabinet has approved rules under which descendants of Jews expelled from Portugal more than 500 years ago can claim citizenship.