Up to 16,000 sea otters once roamed from Oregon to Mexico, but the species was hunted to near extinction for its fur during the 18th and 19th centuries.
The end of the ban south of Point Conception extends federal protections to otters throughout their historic range.
"Trying to tell a marine mammal to stay on one side of an imaginary line across the water was a dumb idea," said Steve Shimek, executive director of Monterey's The Otter Project.
Lifting the ban, he said in a statement, "will not only protect sea otters from harm, but because of the otters' critical role in the environment, it will also help restore our local ocean ecosystem."
The Otter Project and the Santa Barbara-based Environmental Defense Center sued to get the ban lifted. A 2009 settlement led to Tuesday's action by the U.S. Fish and Wildlife Service.
"Sea otters are now legally free to float the sunny Southern California waters without the threat of being trapped and deported to Northern California," the activist groups said in a joint news release.
Federal officials had been concerned that oil spills could wipe out otter recovery chances, so it was decided in 1987 to ban the mammals in southern waters. They tried to establish a backup population on remote San Nicolas Island in the southern Channel Islands chain.
But the otters ignored the imaginary line and the San Nicolas otters refused to stay put. The numbers there dwindled.
The Navy and commercial fishing and oil interests had objected to bringing otters south, saying they could compete for resources and complicate offshore development.
"Southern sea otters have been largely absent from their historic Southern California habitat for far too long," Environmental Defense Center lawyer Brian Segee said in a statement.
"This decision is a critical step in efforts to recover southern sea otters, by formally allowing this charismatic and intelligent species to naturally return to waters south of Point Conception."
The southern sea otter population numbers around 2,800. It is listed as threatened under the Endangered Species Act and depleted under the Marine Mammal Protection Act.
Information from: Santa Cruz Sentinel