The move comes ahead of a general election scheduled for Dec. 23, the first since former Prime Minister Thaksin Shinawatra was ousted in September 2006 and martial law was decreed for all the country's 76 provinces.
Critics have called on the government to lift the measure ahead of the polls, saying political parties should be able to campaign freely without fear of military intimidation.
The measure empowers the military to be in charge of security and make arrests without warrants in the name of maintaining order. Critics are afraid such powers could be used against politicians the military opposes, such as Thaksin's still loyal followers.
"The lifting of martial law will ease tension and make it easier for political parties to carry out their political campaigns," said government spokesman Chaiya Yimwilai.
He said the Cabinet agreed Tuesday that martial law will be lifted in 221 districts, leaving it in place in 179 districts in 27 provinces.
The post-coup interim government has over several months gradually reduced the area where the measure remained in force.
Chaiya said that most of the districts where martial law remains in place are border areas where problems of drug trafficking and illegal immigration are rampant, as well as the three southernmost provinces wracked by a Muslim insurgency.
The lifting order needs to be endorsed by King Bhumibol Adulyadej before it takes effect. The king has been hospitalized since Oct. 13 after suffering the symptoms of a stroke.
The discovery of the submarine has unveiled a few "inconsistencies." For example, how can one explain the fact that the sub was found where it needed to be searched for from the start?