Taiwan's parliament has approved a bill to allow referendums - a move China's leadership fears could one day lead the island to declare formal independence.
Feelings were running high in parliament
The new bill gives Taiwan's president the power to call a referendum on independence if China attacked.
But the opposition pushed through a clause that blocks referendums on the most sensitive subjects, including sovereignty and changing Taiwan's name.
China has threatened to act if Taiwan makes any moves towards independence.
The Chinese Government, which views Taiwan as a renegade province, had said it would "make a strong response" if a referendum law without restrictions was passed.
Beijing fears that if the mechanism for referendums is established, it could be used to force a vote on independence.
Chen has made referendums a key election issue
The vote started after 1600 local time (0800 GMT) amid heated argument with MPs considering several different versions of the referendum bill.
The version passed was a watered down one, written by the opposition which has a parliamentary majority. This gives the legislature the power to screen potential referendum issues that might involve changes to the constitution.
And a clause supported by the opposition KMT was also approved, making it clear that referendums will not be allowed to make changes to Taiwan's name, flag or sovereignty.
The opposition was also successful in passing an article that said only the public and parliament could initiate a referendum.
President Chen Shui-bian had wanted the government to also have the power to call such a vote.
These key exemptions may go some way to placating China that the island's referendum law is not a precursor to independence.
However, parliament did give Mr Chen the right to call a referendum on independence if China were to use force to make the island unify with the mainland.
As the Taiwanese parliament voted, China's state media called Taiwan's President Chen a "troublemaker" who was bringing disaster to the island.
"The referendum plan on a new 'constitution' will not be tolerated by the Chinese people, including the compatriots in Taiwan," the official Xinhua news agency said.
Eyes on election
Opinion polls suggest that the majority of Taiwanese people prefer the ambiguous status quo of their island.
The BBC's Chris Hogg says the referendum issue used to be a taboo subject in Taiwanese politics. Fears that it would provoke China to use force stifled serious debate.
But, he says, politicians on all sides seem to have decided they can now use it to drum up support ahead of presidential elections next March.
President Chen has made referendums a key issue in his campaign for re-election as leader.
The KMT still wants reunification with China
His cabinet is also is keen to stage referendums on issues such as nuclear power and membership of the World Health Organisation during next year's presidential vote.
The KMT also recently dropped its objection to referendums, realising that its policy was losing it public support.
Although Taiwan functions as an independent country, it is officially recognised by fewer than 30 countries.
The two sides of the Taiwan Strait have been divided since 1949 when the KMT, headed by Chiang Kai-shek, lost a civil war in China and fled to Taiwan.