Allawi's decision cleared another potential hurdle in long and contentious negotiations between Iraq's Shiite, Sunni and Kurdish political blocs to form a new government after the inconclusive election.
Prime Minister Nuri Al-Maliki is to present his new Cabinet to Parliament on Monday. He will win a second term if lawmakers approve his Cabinet and government program as expected.
Senior officials said Al-Maliki would reappoint Oil Minister Hussain Al-Shahristani and Foreign Minister Hoshiyar Zebari.
The appointment of a new government could reassure foreign investors as Iraq tries to raise output from its rich oilfields and rebuild its shattered infrastructure.
The participation of Allawi and his cross-sectarian Iraqiya coalition could also help ease concern about renewed bloodshed with Iraq emerging from years of war and US troops withdrawing by the end of 2011.
Iraqis have been waiting for a new government since the March 7 election, whose aftermath underscored the fragility of Iraq's nascent democracy and the depth of its ethnic and sectarian divisions.
Allawi, a Shiite himself, had wanted to unseat Shiite Premier Al-Maliki after Iraqiya won 91 seats in the new Parliament with strong backing from minority Sunnis. But Allawi failed to forge the alliances needed for a majority in Parliament.
He had warned that any attempt to marginalize his coalition could reinvigorate a weakened but still lethal insurgency.
Washington and Iraq's Sunni Arab neighbors were anxious to ensure that Allawi's bloc was represented in the government.
Allawi said he would accept a job as head of a strategic policy council that was offered in a power-sharing deal agreed with Al-Maliki and Kurdish President Masoud Barzani on Nov. 10.
"We will accept the leadership of this council based on the agreements that have occurred and have been signed between me and Mr. Barzani and Mr. Maliki," Allawi told a news conference. "So this is concluded. If there is any change to the agreements on power, then there will be a different story altogether."
Allawi vacillated for weeks about joining the government after the Nov. 10 accord between the political factions that put Al-Maliki on course for a second term as premier. The accord also returned Kurd Jalal Talabani to the presidency and gave Sunni Osama Al-Nujaifi the speaker's post in Parliament.
At one point Allawi declared power-sharing dead and said he would not participate in the government. But Washington and Iraq's neighbors pressed political leaders to ensure all the major ethnic and sectarian blocs were represented.
Politicians finally reached a compromise that allowed Al-Maliki to claim a second term and included Sunni-backed Iraqiya and lawmakers from the semi-autonomous northern Kurdish region.
Al-Maliki was expected to unveil a Cabinet that will eventually include 42 members. He was not expected to immediately appoint a defense minister, who controls the army, or an interior minister, who controls the police, due to a lack of qualified, independent candidates for the sensitive security posts.
Iraqiya will receive 11 ministries, including finance, defense, education, agriculture, communications and electricity, an Iraqiya member said. "We agreed on the ministries we should get but we have not submitted names so far for the prime minister," Allawi said.
