If it goes on to be approved by the Senate, Uruguay will become the first country to regulate the production, distribution and sale of marijuana.
The law is backed by the government of President Jose Mujica, who says it will remove profits from drug dealers and divert users from harder drugs.
Under the bill, only the government would be allowed to sell marijuana.
The state would assume “the control and regulation of the importation, exportation, plantation, cultivation, the harvest, the production, the acquisition, the storage, the commercialisation and the distribution of cannabis and its by-products”.
Buyers would have to be registered on a database and be over the age of 18. They would be able to buy up to 40g (1.4oz) per month in specially licensed pharmacies or grow up to six plants at home.
The bill was approved by 50 of the 96 MPs in the lower house following a fierce 13-hour debate.
Those who backed the project belonged to the ruling Frente Amplio (Broad Front) coalition, which has a majority of one in the House.
Frente Amplio Congressman Dario Perez had earlier threatened to vote against the bill but agreed to back it on the day.
It is expected to be approved by the Senate, where the left-wing government has a bigger majority.
President Jose Mujica says he has never tried marijuana but believes it should be decriminalised
The bill was unveiled last year by Defence Minister Eleuterio Fernandez Huidobro who argued that “the prohibition of certain drugs is creating more problems for society than the drugs themselves”.
But Mr Cardoso of the opposition Colorado Party said that “in no country in the world has the consumption of drugs been reduced through legalisation”.
Another opposition politician, Richard Sander, said that even if the law made it through both chambers, he would launch a petition to have it overturned.
The vote comes amid fierce debate about drug legalisation in Latin America.
A group of former presidents and influential social figures, including the Brazil’s Henrique Cardoso, the Mexico’s Ernesto Zedillo and Colombian ex-leader Cesar Gaviria, have called for marijuana to be legalised and regulated.
But only last week Pope Francis criticised drug legalisation plans during a visit to Brazil.
Speaking at the inauguration of a clinic for drug addicts in Rio de Janeiro he said it was “necessary to tackle the problems which are at the root of drug abuse, promoting more justice, educating the youth with the values that live in society, standing by those who face hardship and giving them hope for the future”.
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