Published in the Lancet, the results of the new study have prompted its authors to call for the development of female-focused testosterone supplements and for policy makers to consider recommending them routinely.
A team at Monash University in Melbourne examined the results of trials involving 8,480 women, comparing those who had been given extra testosterone with a placebo.
Only minor adverse side-effects were recorded, restricted to small weight gain, mild acne and increased hair growth.
However, the scientists said better data was needed to rule out an increased cancer risk from extra testosterone.
Professor Susan Davis, the study's senior author, said: "Nearly a third of women experience low sexual desire at midlife, with associated distress, but no approved testosterone formulation or product exists for them in any country and there are no internationally-agreed guidelines for testosterone use by women.
"Considering the benefits we found for women's sex lives and personal wellbeing, new guidelines and new formulations are urgently needed."
The results showed that sexual arousal, the ability to have an orgasm and women's sexual wellbeing also improved for those taking extra testosterone.
The researchers said that future trials should develop ways of delivering the hormone non-orally because oral delivery appears to increase cholesterol.
The study found no beneficial effects on cognitive measures, bone mineral density, body composition or muscle strength.
"The beneficial effects for postmenopausal women shown in our study extend beyond simply increasing the number of times a month they have sex," says Professor Davis.
"Some women who have regular sexual encounters report dissatisfaction with their sexual function, so increasing their frequency of a positive sexual experience from never, or occasionally, to once or twice a month can improve self-image and reduce sexual concerns, and may improve overall wellbeing."