He said they would also have the right to be appointed to the consultative Shura Council.
The move was welcomed by activists who have called for greater rights for women in the kingdom, which enforces a strict version of Sunni Islamic law.
The changes will occur after municipal polls on Thursday, the king said.
King Abdullah announced the move in a speech at the opening of the new term of the Shura Council – the formal body advising the king, whose members are all appointed.
“Because we refuse to marginalise women in society in all roles that comply with sharia, we have decided, after deliberation with our senior clerics and others… to involve women in the Shura Council as members, starting from next term,” he said.
“Women will be able to run as candidates in the municipal election and will even have a right to vote.”
The BBC’s world affairs correspondent Emily Buchanan says it is an extraordinary development for women in Saudi Arabia, who are not allowed to drive, or to leave the country unaccompanied.
She says there has been a big debate about the role of women in the kingdom and, although not everyone will welcome the decision, such a reform will ease some of the tension that has been growing over the issue.
Saudi writer Nimah Ismail Nawwab told the BBC: “This is something we have long waited for and long worked towards.”
She said activists had been campaigning for 20 years on driving, guardianship and voting issues.
Another campaigner, Wajeha al-Huwaider, said the king’s announcement was “great news”.
“Now it is time to remove other barriers like not allowing women to drive cars and not being able to function, to live a normal life without male guardians,” she told Reuters news agency.
Correspondents say King Abdullah has been cautiously pressing for political reforms, but in a country where conservative clerics and some members of the royal family resist change, liberalisation has been very gradual.
In May more than 60 intellectuals called for a boycott of Thursday’s ballot saying “municipal councils lack the authority to effectively carry out their role”.
Municipal elections are the only public polls in Saudi Arabia.
More than 5,000 men will compete in municipal elections on Thursday – the second-ever in the kingdom – to fill half the seats in local councils. The other half are appointed by the government.
The next municipal elections are due in four years’ time.