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Khin Maung Win, Associated Press
Nilar Thein, center, an activist of the 88 Generation Students Group, shakes hands with one of her colleagues as she arrives at Yangon airport after released from Theyet prison in Yangon, Myanmar, Friday, Jan. 13, 2012. Myanmar freed some of its most famous political inmates Friday, sparking jubilation outside prison gates while signaling its readiness to meet Western demands for lifting economic sanctions.

YANGON, Myanmar — Myanmar's release of political prisoners drew praise from longtime critics of its once-authoritarian government, with Washington responding with a major diplomatic reward.

The release sparked jubilation among the country's pro-democracy activists — who were reuniting with their freed comrades Saturday — while signaling the government's readiness to meet Western demands for lifting economic sanctions.

The United States immediately announced it would upgrade diplomatic relations with the country it has shunned for more than two decades for its repressive policies.

Political activists, bloggers, a former prime minister, heads of ethnic minority groups, and relatives of former dictator Ne Win were among the 651 detainees released Friday under a presidential pardon allowing them to take part in "nation-building."

It was the latest in a series of accelerating changes in Myanmar, including the start of a dialogue with opposition leader Aung San Suu Kyi, the legalization of labor unions and the signing of a cease-fire in a long-running campaign against Karen insurgents.

President Barack Obama praised the release as "a substantial step forward for democratic reform," and U.S. Secretary of State Hillary Rodham Clinton said ambassadors would be exchanged between the countries in response.

"This is a lengthy process, and it will, of course, depend on continuing progress and reform. But an American ambassador will help strengthen our efforts to support the historic and promising steps that are now unfolding," Clinton said.

The U.S. has not had an ambassador in Myanmar — formerly known as Burma — since downgrading its representation after a 1988 pro-democracy uprising was harshly put down by the army.

"With the restoration of full diplomatic relations, the United States has shown the government of Myanmar that it is ready to react quickly to concrete reforms," Suzanne DiMaggio, a policy analyst for the New York-based Asia Society, said in a statement. "It also sends a message to the people of Myanmar that the United States is working to encourage the process of democratization during this fragile period of transition."

But the United States and its allies may take a wait-and-see approach on sanctions to ensure that government truces with various ethnic rebel groups stay in effect, that discussions with Suu Kyi move forward, and that elections in April are free and fair.

A parade of top Western diplomats has visited Myanmar lately — Clinton in December and British Foreign Secretary William Hague last week. French Foreign Minister Alain Juppe is to arrive this weekend.

The message conveyed by Western countries has been clear: They are encouraged by the reform process under President Thein Sein, but economic and political sanctions could not be lifted unless the prisoners were freed. The sanctions generally ban doing business with Myanmar, block financial transfers by military-backed leaders and their cronies, and deny visas to the same VIPs.

"I think we are close to the removal of Western sanctions," said Monique Skidmore, a Myanmar expert at the University of Canberra, adding that the U.S. and others might first wait to see Suu Kyi take a seat in parliament. "There's a sense that there's still more to go before the sanctions will be removed."

Official reaction to the prisoner release was upbeat from groups that had taken a tough stand against repression in Myanmar.

"This is a courageous step and a further confirmation that the reform course chosen by the government of Burma-Myanmar continues," said Catherine Ashton, high representative of the European Union for foreign affairs and security policy.

"The release of all political prisoners is a long-standing demand of the international community and I warmly welcome these releases as a further demonstration of the Burmese government's commitment to reform," Britain's Hague said.

Human rights activists added a word of caution.

"While we welcome the releases, thousands more remain behind bars. Pressure for progress on the remaining prisoners and other human rights concerns in Myanmar must not abate," said Suzanne Nossel, Amnesty International USA's executive director. "The risk is that the restoration of ties between the two countries may be premature and could weaken the pressure to address critical areas of unfinished business in addressing serious human rights abuses in Myanmar."

She highlighted conflicts in ethnic minority areas as another crucial problem for Thein Sein's government to address.

Thein Sein's government seeks to normalize relations with the West, which generally defers to Suu Kyi in judging the progress toward democracy.

Suu Kyi's party, marginalized for more than two decades of military rule, seeks a more active role in politics if the government allows a more level playing field. The re-entry of her National League for Democracy party into mainstream politics is the kind of endorsement the government needs to win Western approbation.

Until this week, even some of Suu Kyi's supporters feared she had sold herself short. Myanmar's most prominent political prisoners had remained behind bars with hardly a sour note struck by Suu Kyi in public. Cease-fire talks had been held between the government and guerrilla groups of various ethnic minorities, which have been fighting for autonomy for decades, but were overshadowed by fighting in the north against the Kachin minority.

On Thursday the government announced a cease-fire with the main ethnic Karen group — the most durable rebel movement — and the prisoner release followed.

The Obama administration's speedy announcement of the upgrade in diplomatic relations is a strong indicator that the two countries have choreographed their actions in advance.

The moves come just ahead of visits by some U.S. senators influential in foreign affairs, including Mitch McConnell and John McCain.

While the prisoner release apparently covered all political detainees listed by Suu Kyi's party, as many as 900 others not recognized by the party may still be behind bars, according to human rights groups such as Amnesty International, who have called for a full accounting.

"The release of such a large number of political prisoners demonstrates the government's will to solve political problems through political means," said Win Tin, a senior member of Suu Kyi's party who spent 19 years in prison. "This amnesty will ease political tension before the upcoming April by-election. The other major problem the government has to seriously tackle now is the issue of ethnic fighting, especially in Kachin state."

Suu Kyi's party decided to rejoin electoral politics after the military-backed but elected government took office in March 2011, replacing army rule and tentatively easing years of repression.

It won a 1990 general election but was denied power after the military refused to allow parliament to be seated. In 2010, the military held another general election, but the party said the rules were unfair and declined to participate, leading to its being removed from the list of legal political parties.

"I think this year we shall find out whether we are making progress toward democracy," Suu Kyi said in an interview with The Associated Press last week, adding that benchmarks to consider are "the release of all political prisoners, ... how the by-elections are conducted, ... how much more freedom of information is allowed and whether strong steps are taken to establish the rule of law."

Among those released Friday was Min Ko Naing, a prominent student leader from the failed 1988 pro-democracy uprising.

Cheers and applause erupted outside the Thayet prison, 545 kilometers (345 miles) north of Yangon, where a huge crowd gathered to see the charismatic activist, who was serving a 65-year sentence.

Activists arrested in connection with the 2007 monk-led Saffron Revolution — named for the color of the robes worn by the country's Buddhist monks — were also freed. Among them was Shin Gambira, 32, a militant monk who helped lead the protests.

Several journalists and bloggers were freed, including some who covertly videotaped the 2007 rebellion and smuggled their footage out for the Democratic Voice of Burma, a Norway-based website and satellite TV station. Their plight was chronicled in the 2008 Academy-award nominated documentary "Burma VJ."

Also freed was ethnic leader Khun Tun Oo, chairman of the Shan Nationalities League for Democracy, who was serving a 93-year sentence. He had been arrested with several other Shan leaders in 2005 and charged with treason.

Former Prime Minister Khin Nyunt also was released. He was ousted in 2004 after falling out of favor with the junta and convicted a year later of insubordination and corruption and sentenced to 44 years of house arrest.