Proponents of the move say destroying the human embryos opens the door for research aimed at one day better treating, if not curing, ailments from diabetes to paralysis - research that has drawn broad support, including from notables like Nancy Reagan, widow of the late Republican President Ronald Reagan, and the late Christopher Reeve.
But it stirs intense controversy over whether government crosses a moral line with such research.
Obama will hold an event at the White House to announce the change, a senior administration official said Friday. The official spoke on condition of anonymity because the policy had not yet been publicly announced.
Embryonic stem cells are master cells that can morph into any cell of the body. Scientists hope to harness them so they can create replacement tissues to treat a variety of diseases - such as new insulin-producing cells for diabetics, cells that could help those with Parkinson's disease or maybe even Alzheimer's, or new nerve connections to restore movement after spinal injury.
The aim of the policy is to restore "scientific integrity" to the process, the administration official said.
Critics immediately denounced the move.
"Taxpayers should not have to foot the bill for experiments that require the destruction of human life," said Tony Perkins of the conservative Family Research Council. "President Obama's policy change is especially troubling given the significant adult stem cell advances that are being used to treat patients now without harming or destroying human embryos."
Indeed, there are different types of stem cells: So-called adult stem cells that produce a specific type of tissue; younger stem cells found floating in amniotic fluid or the placenta. Scientists even have learned to reprogram certain cells to behave like stem cells.
But Obama made it clear during the campaign he would overturn Bush's directive.
During the campaign, Obama said, "I strongly support expanding research on stem cells. I believe that the restrictions that President Bush has placed on funding of human embryonic stem cell research have handcuffed our scientists and hindered our ability to compete with other nations."
Once the change is in place, scientists will be able to start applying for taxpayer-funded grants through the National Institutes of Health.
The NIH already has begun writing guidelines that, among other things, are expected to demand that the cells being used were derived with proper informed consent from the woman or couple who donated the original embryo.