Currently it is illegal to fly a national flag without permission from a local council - unless it is flown from a vertical flagpole.
The rule means thousands of football fans were technically breaking the law during the World Cup by displaying the Cross of St George.
Ministers say it will be scrapped in a planning shake-up that will also see a clampdown on illegal roadside ads.
Housing and planning minister Yvette Cooper urged councils to take a tough stance against those who try to get around planning rules by putting unauthorised adverts in fields by the side of motorways and major roads.
She also called on councils to work closely with the Highways Agency to ensure roadside advertising is appropriate to the landscape and does not pose a hazard to those using the roads.
'Unsightly ads'
She wants to build a database of persistent offenders to help local authorities mount prosecutions.
"Too many of our motorways are now strewn with illegal trailer adverts, which cause hazards for drivers and are unsightly too," said Ms Cooper.
"Just because the ads are parked on trailers doesn't mean they should be able to dodge proper planning and safety rules."
There will be an eight week consultation period with the new regulation expected to come into force in April 2007.
The database of illegal advertising offenders will launch later in the year.
The Campaign to Protect Rural England, which has been campaigning for months to rid the countryside of advertising, welcomed the initiative.
"We also believe that these measures will only work if the database includes information on sites as well as companies so that local authorities can take enforcement action more quickly," a spokesman said.
'Ridiculous laws'
The rule changes will allow national flags to be flown without permission however they are displayed. It will also apply to international flags, such as the EU, UN or commonwealth flags.
"The regulations on flags are currently woefully out-of-date and far too bureaucratic," said Ms Cooper. "It is ridiculous that someone could be prosecuted for displaying their national flag."
She added: "As the World Cup demonstrated, many people want to show their support for their national team and they should be able to do so without fear of prosecution."
A Peterborough family fell foul of the regulations during the World Cup when they were threatened with prosecution for flying the cross of St George outside their home.
But a compromise was reached when the city council said the flags could be flown but only on special occasions.
The council had claimed that a single vertical pole would have been fine but because two St George flags were flown at an angle to the house they were classed as advertising.
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