"The People's Assembly has approved by a 308-member majority the presidential decree to extend the state of emergency for a period of two years," the official MENA news agency said.
A parliamentary source told AFP that 103 MPs had voted against the extension of the law which is due to take effect on June 1 and run until May 31, 2012. Forty-three MPs did not vote.
In Washington, State Department spokesman Philip Crowley said the United States was "disappointed" about the move.
"We have questions about how this fits with pledges the government of Egypt has made to its own people, to try to find a way to move beyond the emergency law," Crowley said.
The law has come under repeated fire from international human rights groups, who say thousands of prisoners have been detained without charge, many for more than a decade.
Special courts set up under the law deny a right of appeal.
In a speech to parliament earlier, Prime Minister Ahmed Nazif urged lawmakers to vote for an extension, but sought to reassure critics by pledging only to apply the law to cases of terrorism and narcotics.
"The government... commits itself... not to use the extraordinary measures made available under the emergency law except to confront the threat of terrorism and narcotics," Nazif said.
It is not the first time the government has pledged to limit the use of the law to terrorism and narcotics, and opponents and rights groups have repeatedly accused it of failing to stick by its promises.
Nazif said this time, however, the restrictions to the law's application would be made explicit in the resolution before parliament.
According to a government statement, the law will no longer allow authorities to monitor all forms of communication, monitor or censor media, confiscate property or evacuate and isolate certain areas.
Under the resolution the government will be legally limited to using extraordinary powers for "the arrest and detention of persons suspected of being involved in crimes of terrorism and narcotics trafficking," the statement said.
Human Rights Watch and opposition members slammed an extension to the law and said new restrictions on the application were merely cosmetic.
"The government has stated repeatedly that it would limit the emergency law's use to narcotics and terrorism. This isn't a new position," HRW's Heba Morayef in Cairo told AFP.
"The government's track record gives little reason for optimism for a shift in attitude," she said.
But the fact the government felt the need to address the issue of law's application is a "sign that they feel under pressure, knowing that extending the emergency law makes them look bad," she said.
"It's just a new look for the old emergency law," said George Ishak, a senior member of the National Assembly for Change led by Mohamed ElBaradei, a former head of the International Atomic Energy Agency and Egypt's most high profile dissident.
The law "will still be used against the opposition because authorities can accuse any of them of terrorism," he told AFP.
The move had widely been expected to go through considering it needs a majority to pass and parliament is dominated by President Hosni Mubarak's National Democratic Party.
The state of emergency was imposed in 1981 after the assassination by Islamists of president Anwar Sadat and has been repeatedly renewed since then.
Authorities have used the state of emergency to clamp down on opponents, including Egypt's largest opposition movement, the banned Muslim Brotherhood, whose members control one fifth of parliament seats, sitting as independents.
The opposition fears the law will be used to crack down on regime opponents ahead of parliamentary elections later this year. Egypt is also to hold presidential elections in 2011.
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