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It marks a major shift in modern republicanism - up until now, Sinn Fein had regarded participation in a Northern Ireland body as a tacit acceptance of partition.
The agreement came at the party's annual conference, which included about 30 IRA prisoners granted special leave to vote.
The British and Irish governments welcomed the decision to formally approve the peace agreement signed at Stormont in April to create the Northern Ireland Assembly and new cross-border institutions.
The Irish Prime Minister, Bertie Ahern, said he now looked forward to an overwhelming 'yes' vote in referendums on the deal later this month.
The British government praised the Sinn Fein leader, Gerry Adams, saying the decision marked a final realisation that violence did not pay.
The Northern Ireland Secretary, Mo Mowlam, expressed her delight at the outcome.
"I recognise how significant this decision is for republicans and pay tribute to the leadership of Gerry Adams in bringing his party to support the agreement, north and south of the border," she said.
In what she described as an "exceptional decision", the IRA's commanding officer in the Maze Prison Patrick Wilson was among the 30 republican inmates freed for the conference in an effort to bring about a "Yes" vote.
Sinn Fein also voted to amend its constitution to allow members to sit in a new Northern Ireland Assembly after Mr Adams told his members they had a real chance to influence the strategy of the party and the way towards a united Ireland.
Martin McGuinness, one of Sinn Fein's UK MPs, told the BBC he was optimistic about achieving a "Yes" vote in the referendum due to be held on 22 May.
"I think there are concerns naturally among a small section of the Sinn Fein membership, but I have to say I think the mood all over the island is that moving into the assembly to further our republican objectives towards our ultimate goal of a united Ireland is at this moment in time the sensible thing to do," he said.
On 22 May 1998, 71% of voters from Northern Ireland and 94% of those in the Irish Republic showed their support for the Good Friday peace agreement.
Throughout the first three years of the agreement's implementation, unionists accused republicans of failing to live up to the spirit of the agreement's requirement for the decommissioning of arms.
On the other hand, Sinn Fein accused the British government of failing to demilitarise quickly enough.
It added that it could not force anyone to give up arms and that the agreement only stated that the parties should use all their power to influence the process.
Disagreement over decommissioning and policing led to the suspension of the Northern Ireland Assembly twice in 18 months - in February-May 2000 and in August 2001.
The issue of decommissioning remained the major stumbling block in talks between all parties seeking to restore devolution after the Northern Ireland Assembly was suspended in October 2002.
Direct rule only ended in May 2007 when devolution returned to Northern Ireland with DUP leader Ian Paisley as first minister.
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