They told the government that the technology was worthy of investigation but should be carefully controlled.
Researchers believe they can revolutionise medicine if they are allowed to apply to humans some of the technology pioneered in Dolly the sheep.
However, so-called therapeutic cloning, which could result in cures for diseases like Parkinson's and Alzheimer's, is highly controversial as it requires experiments on early-stage embryos.
Close monitoring
Professor Donaldson and his advisory group have been examining the issues surrounding therapeutic cloning for almost a year.
They told the government that the technology was worthy of investigation but should be carefully controlled.
Professor Donaldson said: "The committee looked very carefully at the ethical issues and decided the potential benefits outweighed some of the concerns and would be justified by the potential benefits for future generations of patients."
The panel recommended that:
Perfect-match tissue
Central to therapeutic cloning are the "master" cells that exist in a human embryo when it is just a few days old.
If these cells can be directed in the lab to become selected types of tissue, they could be used to treat a host of degenerative diseases which at present are incurable.
And producing the embryos through a cloning step similar to the one used to make Dolly would ensure the transplant tissue suffered no rejection problems - it would be a perfect match for the patient.
Although exciting developments are also being made with many other types of stem cell that are extractable from adults, many scientists believe only the ES cells will offer the full range of benefits they seek.
Ethical objections
Professor Ian Wilmut, the scientist who led the team that developed the cloning technology used to create Dolly, said: "In the end, this research to produce stem cells for therapy will lead to novel treatments for some conditions - such as Parkinson's disease, spinal cord injury, stroke and diabetes - that reflect damage to cells that aren't repaired or replaced.
"There isn't an effective treatment for any of these conditions at the present time."
However, "pro-life" groups and some churches denounced the panel's recommendations, arguing that therapeutic cloning was totally unacceptable - whatever the potential benefits.
They said experimentation on embryos was an affront to the sanctity of human life.
Peter Garrett, of Life, said: "What is being proposed here is that we deliberately create and then deliberately destroy tiny human lives. That's bad medicine and we should move away from it."
Opponents also believe the acceptance of therapeutic cloning sets a dangerous precedent that will inevitably lead to so-called reproductive cloning - the creation of identical babies.