The reform, aimed at ending decades of political instability associated with Italy's post-war pattern of revolving door governments, was approved with 334 votes in favour and only 61 against in the National Assembly.
It will come into force next year, by which time reformist Prime Minister Matteo Renzi also hopes to have enacted constitutional change further streamlining the country's governance by abolishing the Senate, parliament's second chamber which currently has major powers to delay and block legislation.
The comfortable victory for Renzi had been anticipated after his centre-left government won three related confidence votes last week.
The bill will guarantee a majority of seats in parliament to the party that gets the most votes in an election through a winner's premium that will see the top party or alliance of parties automatically take 340 of the 630 seats in the National Assembly.
If no party gets 40 percent of the popular vote on a first round, there is provision for a second ballot and parties will have to get at least three percent of the vote to have any representation in parliament.
"Commitment honoured, promise respected," Renzi tweeted after the vote.
"Italy need those who don't always say no. Forwards, with humility and courage. It's #agoodtime."
Prior to the vote, Renzi told an audience of stock market traders in Milan that he regarded a new electoral system as central to his broader reform agenda.
"The new law has an element of great clarity: it will be clear who won and who will govern for five years," he said, adding that "this political stability is a precondition of economic innovation."
The reform had triggered strong opposition from political rivals and some of Renzi's party allies who fear the youthful premier, who is by far the country's most popular politician, is seeking to consolidate his grip on power.
There are also misgivings among academics who fear too much power will be concentrated in the hands of the cabinet.
An important reform
Renzi has rebuffed charges of a power grab, saying Italy has to move towards something similar to the two-party systems in place in many other democracies if it is to address serious and deep-rooted problems in its economy, and administrative, judicial and political systems.
That view was endorsed by Marc Lazar, an Italy expert at Paris's elite Sciences Po graduate school.
"It is an important date for Italy. It may be the umpteenth reform of the electoral law but this one is important, which explains why the debate has been so vigorous," Lazar told AFP.
"It will give the country political stability -- a major issue for Italian politics will be finally resolved."
Lazar said fears of a possible threat to democracy were exaggerated but understandable given Italy's experience of fascism and more recently the three terms served by Silvio Berlusconi, who was accused of using his time in office to serve the interests of his media and business empire.
For Renzi, the victory on electoral reform follows success last year in forcing through labour market reforms that were welcomed by the business world but denounced by Italy's once powerful trade unions.
He has since advanced the Senate reform with most analysts expecting it to be approved by the end of this year.
Renzi, a former mayor of Florence, has also pledged to transform Italy's snail-paced judicial system and says his biggest reform challenge will be to shake up the education system.
But with the economy still struggling and unemployment having recently started rising again from record highs, the jury is still out on whether Renzi can deliver on his objective of transforming Italy.
"In the end, Italians will judge him on other things than this electoral law," Lazar said. "Can he turn the economy around and stop Italy's decline?"