The law gives the go-ahead for therapy being carried out by the Stamina Foundation on dozens of patients to continue, and allows for an 18-month period of clinical trials for the procedure, which had previously been blocked by Italian authorities.
The bill was amended from an earlier version and states the therapy must be carried out under regulatory oversight and using cells made according to the Good Manufacturing Practice (GMP) which the Stamina Foundation has not adhered to.
The Stamina Foundation says its treatment is based on mesenchymal stem cells and could treat diseases like spinal cord injury and motor neurone disease.
But leading scientists have warned that there is no evidence to suggest the treatment could work and no way to know that it will not cause harm.
Umberto Galderisi from the University of Naples and president of Stem Cell Italy, is among critics of the bill.
He said the clinical trials would "never have been allowed" if scientific accepted practice had been followed.
"This is legislating on the basis of public opinion. It means exploiting suffering. Patients are not lab rats," he told AFP, adding there were "no scientific certainties" the therapy could work.
"We do not want Italy to become one of those countries like China or Ukraine where there are untested scientific trials," he said.
Patients lobbied for the therapy to be given the go-ahead, receiving support from various celebrities including actress Gina Lollobrigida.
At one demonstration, protesters wore T-shirts with the slogan: "Yes to Stamina, Yes to Life".
The association Stem Cell Research Italy has branded the new law as "unacceptable" saying the therapy was not backed up by clinical data published in peer-reviewed academic journals.
US journal Nature said it was a "rogue" therapy.