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Scotland’s First Minister had faced pressure from opposition parties to make the change, which applies as long as people test negative on days six and seven of isolation.
The change was announced as Ms Sturgeon confirmed 16,103 new coronavirus cases were recorded in Scotland in the past 24 hours.
She said more than one in 20 people in Scotland are likely to have the virus and she expects this to rise, warning the volume of cases means Covid-19 “still has the potential to overwhelm us”.
She also announced that household contacts of a person with the virus will no longer have to self-isolate for 10 days but instead take lateral flow tests for seven days and isolate if any of those return a positive result.
This applies only to those aged under 18 years and four months old or people who are fully vaccinated, including a booster jag, with others still having to isolate for 10 days and take a PCR test.
In a further alteration to current rules, people who test positive on a lateral flow device will no longer need to take a PCR test to confirm the result, but instead immediately isolate and report the result to Test and Protect.
This applies only to those without symptoms.
All changes come into effect from midnight on Wednesday.
Ms Sturgeon confirmed the changes in an update to a virtual session of the Scottish Parliament on Wednesday afternoon.
She told MSPs: “These changes are significant and not completely without risk.
“However, at this stage of the pandemic they strike an appropriate balance between the continued importance of self-isolation in breaking chains of transmission, and reducing the disruption self-isolation causes in the economy and critical services.”
The First Minister said cases have risen by 87% in the past week, with people in hospital rising by 80% in the same period to 1,223.
However, the number of people in intensive care is “remaining stable”, with 42 patients as of Tuesday night.
Scotland recorded a further five deaths in the past 24 hours of people who tested positive for the virus in the last 28 days, taking this total to 8,872.
Ms Sturgeon said: “This phase of the pandemic is possibly the most challenging so far.
4,034,287 people in Scotland have been tested for #coronavirus
The total confirmed as positive has risen by 16,103* to 999,324
Sadly 5 more people who tested positive have died (9,872 in total)
Health advice➡️https://t.co/l7rqArB6Qu pic.twitter.com/iOS95I4ALw
— Scottish Government (@scotgov) January 5, 2022
“The most infectious variant so far is creating a volume of cases that, notwithstanding its possibly reduced severity, still has the potential to overwhelm us.
“Two years in, the kind of measures that have helped us control transmission in past phases are becoming less tolerable and causing more harm.
“So while not easy, we do need to continually adapt our ways of managing this virus, and we will.”
She said the Scottish Government will publish a revised strategic framework “within the next few weeks” setting out more details on adaptation plans.
Ms Sturgeon also announced a further £55 million to help combat the impact of the measures already in place.
It will be split with up to £28 million for taxis and private hire drivers, £19 million for services such as beauticians and hairdressers, £5 million for sport and £3 million for tourism.