An amendment to Egypt's publishing law will not alter the country's violation of international press freedom standards, a human rights group says.
Journalists protested strongly before the president's intervention
The changes remove some media curbs but still mandate jail for insulting public officials and foreign heads of state.
"Criticising public officials should not be a criminal offence at all, much less one punishable by prison terms," said Human Rights Watch's Joe Stork.
Independent and opposition papers have broadly welcomed the new legislation.
But they also insisted that more changes needed to be made.
Parliament passed the amendment after a last-minute intervention by Hosni Mubarak to remove an article stipulating prison terms for journalists who defamed public officials with allegations of corruption.
Journalists can still be sent to jail for writings that are deemed to insult the president or state institutions such as parliament or the cabinet.
And they still face stiff fines for making defamatory corruption allegations against officials.
"This new law basically tells Egyptian journalists that they risk jail if they are serious about covering foreign affairs or their own leaders," said Mr Stork, deputy director of HRW's Middle East division.
Independent daily al-Masri al-Yom said:
"Freedom of the press has won an unprecedented victory in the history of Egypt... President Mubarak has heeded the call for the right of law and for freedom."
But it continued: "Our demands for lifting all prison sentences will not stop because it is not only a claim affecting journalists but also the rights of citizens".
Analysts say the move to restrict press freedom is part of government efforts to claim back ground lost to its opponents over the past two years, when the US was pressing for democratic change.
The BBC's Heba Saleh in Cairo says independent and opposition newspapers had started to carry unprecedented criticism of Mr Mubarak and other public officials, while civil society groups took to the streets challenging the ban on demonstrations.
But now the US is silent on reform, our correspondent says, and the government is signalling that it has reached the end of its patience with its critics.