Under the plans, companies would be responsible for checking the safety of chemicals used in their products.
Campaigners say the move is necessary because of growing concerns over a rise in cancers, birth defects and other illness which may be caused by exposure to chemicals.
But manufacturers argue the planned measures would be a bureaucratic nightmare and would cost jobs.
"Every day we are exposed to chemicals in our environment, at work or in our homes," said Environment Commissioner Margot Wallstroem as she presented the plans.
"For many of them, we do not know enough about their risks or longer-term effects."
Worldwide impact
Under the proposals, some 30,000 substances would have to be registered with a new EU chemicals agency.
Chemicals which were approved years ago would be subject to more modern and stringent testing.
"
Europe will lose jobs
"
Janet Asherson
CBI
Those that did not pass the tests would be banned.
The legislation could have a major impact on thousands of companies around the world that make chemicals or use them in their products, as it will apply to goods imported into the EU as well as those made there.
David Bow, a senior member of the European Parliament's environment committee, said the legislation represented a radical approach to protecting public health.
Many of the goods kept in households "contain cocktails of chemicals the effects of which are largely unknown," he said.
Laboratory tests devised 40 years ago now seem hopelessly out of date, Mr Bow added.
Lobbying
Many green campaigners are hailing the plans as the most important EU environmental legislation for a decade, although some say they do not go far enough.
Chemicals producers, who are already lobbying fiercely for exemptions, argue the planned changes will cost them tens of billions of euros.
The chemical industry's trade group, known by its French acronym CEFIC, which represents 40,000 companies, said the planned reforms threaten 1.7 million jobs.
"The philosophy behind the new chemicals policy still appears to be too one-sided in concentrating on environmental and health protection," CEFIC said in a statement.
Janet Asherson of the British manufacturers organisation, the Confederation of British Industry (CBI), agreed.
"Europe will lose jobs," she told the BBC, adding that the EU already had the most stringent health and safety rules governing chemicals in the world.
"We will have to test all our chemicals through a rigorous regime, a huge bureaucratic regime, a new agency will be created with committees and boards and registrations and computer records and other countries will not have to do that."
The European Commission estimates that the new measure will cost up to seven billion euros ($7.94bn) and taken at least 10 years to implement.
The bill requires approval by a majority of EU governments and the European Parliament.
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