The yuan is currently allowed to trade 0.5 percent on either side of a midpoint price set by the central bank every trading day.
The new rules will come into effect on Monday and allow the currency to fluctuate by up to 1.0 percent either side, the bank said in a statement.
Beijing's trading partners have long criticised its yuan exchange rate, saying it is kept artificially low, fuelling a flow of cheap exports that have helped trigger huge trade deficits between some countries and China.
China has repeatedly vowed to loosen its grip on the yuan as it moves towards full convertibility but it has rejected calls for a faster appreciation for fear of hurting its manufacturing sector, a key driver of its economy.
Saturday's announcement means that the yuan will be allowed to fluctuate further against the dollar but not necessarily appreciate as much as is demanded by China's trading partners, including the United States.
The bank said the change was decided "in order to meet market demands... (and) enhance the flexibility of RMB (renminbi, as the yuan is officially known) exchange rate in both directions".
"In view of the domestic and international economic and financial conditions, the People's Bank of China will continue to fulfil its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable."
Ting Lu, China economist at Bank of America Merrill Lynch, said the move would ease international pressure to allow the yuan to appreciate and was bigger than market expectations of a 0.7 percent trading band.
"External pressure for RMB-USD appreciation will be alleviated," he said in a note.
China said Friday its economy grew by 8.1 percent in the first three months of 2012, its slowest pace in nearly three years.
However, analysts predicted the world's second-largest economy would avoid a hard landing, which could trigger massive job losses and spark social unrest.
The central bank called in February for the government to move faster to loosen currency controls to make it easier for Chinese companies to invest overseas and boost the yuan's global status.
China restricts the movement of money outside the country such as investment in real estate, stocks and bonds to prevent sudden inflows and outflows of capital that could destabilise its financial system.
Beijing has vowed to increase the use of the yuan in international trade and encourage foreign investment in Shanghai's financial markets, according to a five-year blueprint unveiled this year by the National Development and Reform Commission, a powerful state planner.
But in its study released in February, the central bank said reforms were taking too long and China could loosen investment controls and encourage more enterprises to take opportunities abroad in the next three years.