The Ulster Volunteer Force (UVF) and Red Hand Commando (RHC) will be de-specified, with any prisoners eligible for early release, Shaun Woodward added.
The British government ceased to recognise the UVF’s peace commitment in September 2005 following a feud.
Mr Woodward said: “Under legislation I am obliged to review the status of all specified and other paramilitary organisations and I have today laid an order before Parliament seeking approval to de-specify the UVF and RHC.
“Their statement of last May committed the organisation to assuming a non-military civilianised role. Government undertook to review the position at that time and we have now taken a careful look at the organisation’s position.
“In the light of this and in acknowledgement of their commitment and additional factors, I have therefore concluded that there are sufficient grounds to de-specify the UVF/RHC,” he said.
The early release provisions apply to anybody convicted before the 1998 Good Friday agreement, which paved the way for political power sharing in the north.
The UVF had come under pressure to decommission its weapons.
It said last May it was putting its arms beyond reach — but not handing them over.
In September 2005 the Northern Ireland Office said it would no longer recognise its ceasefire after it was involved in running battles with the rival Loyalist Volunteer Force.
Leader of the Progressive Unionist Party Dawn Purvis welcomed yesterday’s announcement.
“This is a recognition of the work carried out and progress made since the statement of intent of May last year.
“This is further evidence of Northern Ireland’s strides towards normality.”
Alliance party assembly member Stephen Farry said: “Alliance does welcome the increasingly positive reports from the IMC and others regarding the end of paramilitary activities by the UVF.”
Nationalist SDLP MLA Alban Maginnis said the UVF would be judged on its activities.
However, the IRA has been proscribed after being found to be involved in terrorism.
The Independent Monitoring Commission has blamed the IRA for the murder of Andrew Burns, aged 27, of Strabane, Co Tyrone, in February.