"The cabinet today agreed on a bill to eliminate four zeros from the currency and that the 'toman' will be our national currency," government spokesman Ali Rabiei told reporters in Tehran.
Iran had been weighing to drop several zeros for years, but the idea found traction after the national currency depreciated significantly in 2018.
The currency was trading at about 37,000 to the US dollar three years ago, but it slumped to around 190,000 last September after US President Donald Trump withdrew from a 2015 nuclear deal with Iran and reinstated tough sanctions on its economy.
In a bid to simplify transactions, Iranians have long referred to their currency as the toman and chopped off a zero – a unique system that is a source of confusion for foreign visitors.
The government has now okayed this with its latest move, which needs to be forwarded to the Parliament for final approval.
"This will make the national currency more effective," said Rabiei.
"It will be more in line with common practice in society... the rial is not used that much.
"Coins will once again come into circulation," he added.
The International Monetary Fund has forecast Iran's economy to shrink by 6.0 percent this year due to sanctions and rising instability in the Middle East.
AFP and Press TV contributed to this story.