Merlino's lawyer, Edwin Jacobs Jr., said the decision was long overdue.
Merlino, 38, had been held in isolation since being transferred to the new prison at Seventh and Arch Streets in June.
In placing the alleged mob leader in administrative detention, prison officials cited disciplinary and security reasons.
The classification meant that Merlino was housed alone in an 8-by-10-foot cell for 23 hours each day.
He was permitted one hour of recreation but was not allowed to interact with other inmates, and he was limited to one phone call to his lawyer per day.
In a lawsuit filed this month, Jacobs argued that the classification was punitive and unjustified and that the isolation affected Merlino's ability to prepare for trial.
The lawsuit and several related motions filed by Jacobs will be dropped under the terms of the agreement, detailed in court by Assistant U.S. Attorney Seth Weber.
Weber said the prison had agreed to provide Merlino with "reasonable accommodations" for meetings with attorneys and codefendants, including designated periods in the prison's program room and law library.
Weber said that Merlino would be reclassified and placed in the general population and that he and his six codefendants would all be housed in the same seventh-floor south wing of the prison.
The changes will allow Merlino to have normal visits from family members, including his wife and two young daughters, Jacobs said. Merlino will also be allowed five phone calls per day and will be able to eat and socialize with other inmates daily.
More important, Jacobs said, the changes allow the defendants to begin going over the thousands of pages of transcripts and the tapes of hundreds of hours of secretly recorded conversations that make up a large part of the government's case.
The case includes charges of murder, murder conspiracy, racketeering, drug trafficking, loan-sharking, gambling, and dealing in stolen property.
No date has been set for the trial, which is expected to take from two to three months.
Merlino has been held without bail since his arrest in June 1999 on drug-trafficking charges. Most of his codefendants were jailed in March following a superseding indictment that incorporated the drug charges into a broader racketeering case.
"We're not afraid of this case," Jacobs said as he left the federal courthouse yesterday. "We just want an adequate opportunity to prepare for it before we walk into the courtroom."
The agreement reached yesterday, Jacobs said, will allow for that preparation.
George Anastasia's e-mail address is ganastasia@phillynews.com
