The bill, which will further slash pensions and salaries, passed 153-128 in the 300-member Parliament. It came hours after rioters rampaged outside Parliament during an 80,000-strong anti-austerity demonstration, clashing with riot police who responded with tear gas, stun grenades and water cannon.
Approval of the cuts and tax rises worth €13.5 billion ($17 billion) over two years was a big step for Greek efforts to secure the next installment of its international rescue funds, and stave off imminent bankruptcy. Prime Minister Antonis Samaras has said the country runs out of euros on Nov. 16 without the funds.
But the close vote was a major political blow to the three-party coalition government, which holds a total of 176 seats in Parliament. The result shows support for continued austerity three years into Greece's financial crisis is dwindling fast.
Immediately after the vote and before the tally had been officially announced, two of the three coalition parties expelled a total of seven dissenting deputies from their ranks.
Deputies from the third, the small Democratic Left, mostly abstained, in accordance with their party's line. Leader Fotis Kouvelis had said in the days leading up to the vote that he could not back labour reforms included in the bill.
During hours of acrimonious debate in Parliament, Samaras acknowledged that some of the measures in the bill were unfair, but insisted there were vital to avoid bankruptcy and Greece being forced out of the euro and back to its old currency, the drachma.
"This (bill) will finally rid the country of drachmophobia," Samaras said.
"Many of these measures are fair and should have been taken years ago, without anyone asking us to," Samaras said. "Others are unfair — cutting wages and salaries — and there is no point in dressing this up as something else," he said, adding that the country was, however, obliged to take them.