The measure guarantees a majority of seats to the party that wins the most votes in an election.
It is a key element of a package of reforms promised by Italian Prime Minister Matteo Renzi.
The law seeks to end Italy's post-war era of revolving governments, political horse-trading and unstable coalitions.
The lower house of parliament gave final approval to the bill by 334 votes to 61.
The proportional election system awards 340 out of 630 seats to any party that wins more than 40% of the national vote.
If no party reaches that threshold, there is a second-round run-off between the two parties with the most votes.
The electoral reform is expected to come into force next year.
After the vote, Mr Renzi said: "Commitment achieved, promise respected. Italy needs people who don't always say no."
Critics have accused the 40-year-old former mayor of Florence who became prime minster last year of trying to consolidate his grip on power.
They complain that the law awards too much power to single parties, gives party bosses too much scope to select candidates, and denies voters the chance to directly choose representatives. Opposition parties boycotted Monday's vote.
Renato Brunetta, parliamentary head of centre-right opposition party Forza Italia, said afterwards that it was "a very ugly day for our country's democracy".
Mr Renzi wants to further transform the Italian system by abolishing the Senate and replacing it with a non-elected body with lesser powers.
Currently, legislation is often held up because identical versions of bills have to be approved by both houses.

New Healthway, a book on hygiene and health aimed at 11 and 12 year-olds, is printed by one of India's leading publishers.
Academics have urged the government to exercise greater control.
But the authorities say schools should monitor content as they are responsible for the choice of textbooks.
"This is poisonous for children," Janaki Rajan of the Faculty of Education at Jamia Millia University in Delhi told the BBC.
"The government has the power to take action, but they are washing their hands of it," she said.
It is not known which Indian schools have bought the book for their students, but correspondents say what is worrying is that such a book is available to students.
"The strongest argument that meat is not essential food is the fact that the Creator of this Universe did not include meat in the original diet for Adam and Eve. He gave them fruits, nuts and vegetables," reads a chapter entitled Do We Need Flesh Food?
The chapter details the "benefits" of a vegetarian diet and goes on to list "some of the characteristics" found among non-vegetarians.
"They easily cheat, tell lies, forget promises, they are dishonest and tell bad words, steal, fight and turn to violence and commit sex crimes," it says.
The chapter, full of factual inaccuracies, refers to Eskimos (Inuit) as "lazy, sluggish and short-lived", because they live on "a diet largely of meat".
It adds: "The Arabs who helped in constructing the Suez Canal lived on wheat and dates and were superior to the beef-fed Englishmen engaged in the same work."
The publishers, S Chand, did not respond to the BBC's requests for a comment.

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7 April 2015 Last updated at 08:39 BST
Labour needs a swing of 3.9% to oust the Conservative candidate in the west London constituency.
Some residents are concerned that local services cannot support the extra residents that house building will attract.
BBC London's Victoria Hollins reports.
The known candidates for the 2015 General Election for Ealing Central and Acton are:
Angie Bray Conservative Party, Jon Ball Liberal Democrats, Peter Florence UK Independence Party, Rupa Huq Labour Party, Tom Sharman Green Party
The Italian parliament has approved a long-debated and extensive electoral reform that aims to give the country more political stability.
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Meat-eaters "easily cheat, lie, forget promises and commit sex crimes", according to a controversial school textbook available in India.
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Ealing Central and Acton is one of about 20 seats that could shape the outcome of the election.