The Lower house on Tuesday voted to cut Italy's parliamentarians from 945 to 600, by 553 votes to 14 with two abstentions.
After its definitive approval, the bill has now become law.
The constitutional reform cuts MPs from 630 to 400 and Senators from 315 to 200.
Since it was a constitutional bill, the majority of the Lower House, or 316 votes, was required.
Premier Giuseppe Conte said "this is a historic day for Italy".
He said the reform "impacts the cost of politics and makes the workings of the chambers more efficient.
He said "this is a concrete step towards reforming our institutions." Foreign Minister Luigi Di maio, leader of the ruling anti-establishment 5-Star Movement (M5S), which had made the MP cut one of its flagship reform pledges, said "this is a very great victory for citizens".
"This is a historic reform, an extremely great victory for Italian citizens." Addressing supporters outside the House, he said "this is your victory".
Di Maio added: "only the M5S could have got all the parties to vote for this".
The foreign minister also said the M5S would be "loyal" on further moves to enact the reform, "activating all the weights and counterweights to this reform needs".
Cabinet Secretary Riccardo Fraccaro, also of the M5S, said: "It's the day we've been waiting for, forever". "With the crossparty yes of the political forces to the reduction of parliamentarians the M5S makes history in this country, writing a stupendous page of democracy", said Fraccaro.
"After almost 30 years of broken promises the cut in MPs and Senators is a reality: a new political season is starting, now the citizens are at the centre".
Fraccaro guaranteed "the utmost commitment for what will be to all effects a constituent legislature".
Five members of the M5S did not vote in favour of the cut.
The MP cut is a "historic promise kept", the M5S blog said ahead of the vote on the reform that would change Italy's founding constitution.
"We're almost there: soon our constitutional reform bill will move to the Lower House for the last vote," the party of Foreign Minister Luigi Di Maio said.
"It's a historic moment for our country: we will soon have 345 MPs fewer and millions of euros to invest in services for citizens".
The blog said the government alliance, with the centre-left Democratic Party (PD) and the centrist Italia Viva (IV) party, "was born principally to immediately achieve two objectives: reducing the number of Senators and MPs and to avert the VAT hike that would have cost 600 euros a year for every Italian family.
"With the definitive OK from the Lower House we will be able to say that we have maintained the first of these commitments we made to the Italian people, while the second one will be achieved with the budget bill".
The vote on the MP cut went smoothly with the opposition parties voting with the M5S, PD and IV for a long-awaited reform that will streamline governance and make significant savings in parliamentary expenditure.
PD leader Nicola Zinagaretti said "we said yes within a framework of constitutional guarantees".
After the final Lower House vote there will be a confirmatory referendum since the bill makes changes to the Italian constitution.
The reduction would make the Italian parliament among the smaller ones in the European Union.
Voting in favour Tuesday were the M5S, the PD and the populist nationalist opposition parties the League and Brothers of Italy (FdI), as well as Silvio Berlusconi's centre-right Forza Italia (FI) party.
There had been rumours of possible defections in the ranks of the M5S but Labour Minister Nunzia Catalfo said "it will pass without problems".
Minister for Relations with Parliament Federico D'Incà, also of the M5S, said "there will have to be an internal reflection in the M5S unless the reduction in MPs is passed".
Roberto Giachetti of IV said the MP cut was "not the answer" to Italy's governance problems and called for a referendum on "superseding perfect bicameralism", a reform that has on several occasions been urged in the past.
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