Many MPs believe agency staff are discriminated against
Agency workers will be given the same employment rights as permanent staff after 12 weeks under proposals agreed between the government and unions.
Ministers plan legislation this autumn to guarantee agency staff equal treatment but this depends on a similar EU directive being passed before then.
Unions, which have campaigned for the measure for years, said the agreement offered much stronger legal protection.
Employers groups described the agreement as the "least worst option".
There are estimated to be about 1.4 million agency workers in the UK.
The breakthrough on agency workers' rights came after fierce wrangling between unions and employers and amid growing pressure by Labour MPs on ministers to broker a deal.
Under the proposals, agency workers will be given equal pay and holiday entitlements after 12 weeks in a job.
However, the agreement will not cover sick pay or pension payments while temporary staff will have to work the same length of time as full-time workers to enjoy paid maternity leave.
Employers groups, led by the CBI, had lobbied for a period of at least six months arguing that it could lead to firms taking on fewer employees or even letting staff go.
Prime Minister Gordon Brown has said a situation in which agency workers can be paid less for doing the same job as full-time staff is "unfair".
There has been intense pressure from Labour backbenchers over the issue with more than a third of MPs, including John Prescott and Peter Hain, backing a private members' bill on agency workers rights in February.
The proposals hinge on an Europe-wide agreement on agency workers' rights.
EU members are currently debating legislation on the issue and a number of key issues remain undecided. Only when Brussels passes a directive will the UK government be able to put forward "implementing" legislation of its own.
Ministers said Tuesday's agreement was the "right deal" for British industry.
"The agreement achieves our twin objectives of flexibility for British employers and fairness for workers," said Business Secretary John Hutton.
"It will give people a fair deal at work without putting their jobs at risk or cutting off a valuable route into employment."
The TUC said the issue had been "crying out for attention for far too long".
"Too many agency workers in the UK face unfair treatment and injustice," said general secretary Brendan Barber.
"The agreement now opens the door to the much stronger legal protection that agency workers deserve, as our Commission on Vulnerable Employment so graphically highlighted."
The CBI said half of agency placements lasted fewer than 12 weeks, meaning that firms would be protected while trying to fill short-term vacancies at busy periods.
"The government's proposals represent the least worst outcome available for British business," said John Cridland, CBI deputy director-general.
"Agency work is good for temps and for the firms that use them and forms a central plank of the flexible labour market that is so important to our country's prosperity."
One employment analyst said the proposals threatened to burden business at a time when it was feeling the strain of the economic slowdown.
"It would make our labour market less flexible, threaten existing jobs and make it all the more difficult to stave off recession," said Mike Stevens, head of support services at professional services firm KPMG.