David Cameron has said economic sanctions against Burma should be suspended in recognition of the changes taking place in the country.
The prime minister spoke after a meeting with pro-democracy leader Aung San Suu Kyi in Rangoon.
Ms Suu Kyi welcomed his call and said the suspension of sanctions would "strengthen the hand of the reformers".
Mr Cameron is the first Western leader to visit Burma since her success in a series of parliamentary by-elections.
He is also the first UK prime minister to visit the country since it gained independence in 1948.
Earlier, Mr Cameron met President Thein Sein and said the government had to demonstrate that moves to democracy were "irreversible".
'Send a signal'
Burma was ruled for almost half a century by a military junta that stifled almost all dissent and wielded absolute power. The EU, US and other nations imposed sanctions.
The first general election in 20 years was held in 2010.
The installation of a military-backed, nominally civilian government in March 2011 and a series of reforms since - including the release of hundreds of political prisoners - has led to speculation that decades of international isolation could be coming to an end.
Speaking at a joint press conference with Ms Suu Kyi at the lakeside villa where she spent 15 years under house arrest, Mr Cameron said the arms embargo in place against Burma should remain in place, but it was right to suspend - not lift - the remaining sanctions.
They include an assets freeze imposed on nearly 500 people and restrictions on key industries such as mining and timber.
"[Burma] shouldn't be as poor as it is. It shouldn't have suffered under dictatorship for as long as it has, and things don't have to be that way," the prime minister said.
"I do think it is important to send a signal that we want to help see the changes that can bring the growth of freedom of human rights and democracy in your country."
'Long way yet'
Mr Cameron said it was right to respond to signs of change "with care", adding: "All courses of action are full of risk, but I think this is the right step forward."
He also praised Ms Suu Kyi, calling her "an inspiration for people across the world".
She in turn welcomed his call for the suspension of sanctions, saying: "We still have a long way to go but we believe we can get there.
"This suspension will have taken place because of the steps taken by the president and other reformers.
"It would also make it quite clear to those who are against reform that should they try to obstruct the way of the reformers, then sanctions could come back."
EU foreign ministers are to discuss policy towards Burma on 23 April, and sanctions are due to expire on 30 April unless leaders choose to renew them.
The BBC's deputy political editor, James Landale, who is travelling with the PM, says the change in position by the UK makes it very likely that Europe will agree to lift the sanctions.
But he says Mr Cameron's move is a gamble - and some would call it too much too soon - because if there is any regression by the regime it will be difficult to get European nations to agree to reimpose sanctions once again.
Labour shadow foreign secretary Douglas Alexander said "the sequenced lifting of sanctions along with careful monitoring of developments" was "a sensible way forward".
But former Labour minister Baroness Kinnock, the chairwoman of the all-parliamentary group on Burma, sounded a note of caution, saying there must be "clear measures in place to ensure that sanctions will be reimposed if there's no further progress".
"So we need to see interim measures, we need to see deadlines, we need to see benchmarks," she told BBC Radio 4's World at One.
Wai Hnin, from the Burma Campaign UK, told the BBC the recent changes in the country were proof that sanctions were working, but there was still "no democratic system in Burma yet".
"To remove all the sanctions would be a little bit silly - I'm afraid that these changes will stop," she said.
Mr Cameron also revealed he had invited Miss Suu Kyi to visit Britain in June.
She said that two years ago she would have declined, knowing she would have been prevented from returning to Burma.
"Now I am able to say perhaps. That is great progress," she added.
Burma is the final leg of the prime minister's tour of South East Asia promoting UK interests.
Prior to arriving in Nay Pyi Taw, he stopped briefly in Singapore to meet its leader, Prime Minister Lee Hsien Loong.
Ten members of the business delegation, which includes defence firms, accompanying Mr Cameron on his tour are also in Burma.
However, Downing Street has insisted the visit is purely political and the businessmen will merely be carrying out "cultural" activities.
Mr Cameron is not the first major Western figure to visit the country - US Secretary of State Hillary Clinton made a landmark trip to Burma in December 2011.
He is, however, the first sitting UK prime minister to do so - Anthony Eden, who later became PM, travelled there while foreign secretary, and Edward Heath visited after leaving No 10.