The family of Giulio Regeni, who disappeared in Cairo in January 2016 and was found dead ten days later having been brutally tortured and mutilated, immediately voiced its anger at the Italian government's decision.
But Foreign Minister Angelino Alfano suggested there were more prospects now for the truth to be revealed.
"In the light of developments made in cooperation between Italian and Egyptian investigators... the government has decided to send Ambassador Giampaolo Cantini to the Egyptian capital," he said in a statement.
"The Italian government remains committed to shedding full light on the tragic disappearance of Giulio, by sending to Cairo an authoritative figure tasked with helping in seeking the truth," he said.
Italy has rejected multiple theories suggested by Egyptian investigators, including a road accident, a botched crime or a personal vendetta.
The government has insisted that whoever is responsible should be found and brought to justice.
The Italian press and western diplomats in Egypt suspect members of Egyptian security services of having abducted, and fatally tortured Regeni, a 28-year-old doctoral student who was writing about trade unions in the country.
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An Italian autopsy showed that Regeni's body was covered with cuts and his bones were broken, indicating he had been hit with "fists, batons and hammers".
A letter "X" was carved on his forehead and hand, according to the report cited by Italian media.
Regeni was in Cairo researching Egyptian street vendor trade unions, a sensitive topic, and had written articles critical of the government under a pen name.
He disappeared from central Cairo on 25 January 2016, a day when security in the capital was tight as it was the fifth anniversary of the uprising that ousted longtime leader Hosni Mubarak.
The Egyptian government repeatedly and forcefully denied any suggestion of security service involvement, promising a "transparent investigation" to provide "the whole truth" about his disappearance and death.
But frustrated at the pace of the probe, Italy withdrew its then Ambassador Maurizio Massari in April 2016.
Since then prosecutors in charge of the probe in Egypt and in Italy have increased contacts - and on Monday exchanged documents and a phone call, according to a joint statement, while downplaying any sign of a breakthrough.
Regini's family said in a statement that the return of an Italian ambassador to Cairo has "the taste of capitulation done up as art".
"It's only when we know the truth about who killed Giulio and why, when his torturers and all their accomplices are handed over to us, alive, that the ambassador can return to Cairo without trampling on our dignity," they said.