The bill adopted by the cabinet laid down a schedule to be completed by October next year but did not detail the reforms, which are to be proposed by a new Committee for Constitutional Reform.
"The bill sets out the playing field and fixes the length of the game," Reform Minister Gaetano Quagliariello said, adding that the government would not interfere with the committee's work.
The committee will be advised by a group of 35 experts appointed by Prime Minister Enrico Letta and will seek to propose measures agreeable to both the left and right in Italy's uneasy coalition government.
The reforms - which are expected to include proposals to cut the number of lawmakers and the high costs associated with politics - will go to a vote in parliament and likely be put to a referendum.
The debate over the state of Italy's bloated institutions has focused increasingly on whether the country should adopt a French-style semi-presidential system, by which the head of state would be elected by citizens. In Italy, the president is currently voted in by parliament.
Letta has spoken out in favour of a semi-presidential system in recent days, and the centre-right led by former prime minister Silvio Berlusconi supports the plan, but Letta's own centre-left Democratic Party (PD) is strongly divided over the issue.
Among other reforms, the committee is expected to propose cutting the number of members of parliament from the 915 currently elected to the upper and lower house.
Reforms could also include overhauling the country's complicated electoral system blamed for creating a two-month political deadlock following inconclusive elections in February.
While critics complain that the political apparatus is hindering the government's efforts at pulling recession-hit Italy out of a crisis, others have warned of more pressing priorities.
"The constitutional reforms are important, but it would be better to concentrate on employment and growth," said the head of Italy's main business association Giorgio Squinzi.
Italy's economy shrank by 0.5 percent in the first quarter of 2013 in a greater slowdown than expected, and the country is still suffering from high unemployment levels of around 11 percent -- set to rise to a record high of 12.3 percent in 2014 according to the national statistics agency.