Gerhard Shroeder hopes the reforms will attract investment

Key elements of the package approved on Friday include a 15 billion euro ($18.6bn) tax cut as well as labour reforms making it easier to sack staff.

Mr Schroeder said he was prepared to discuss further tax reforms with the conservative opposition.

Critics say the reforms will not help resolve Germany's economic problems.

Mr Schroeder had negotiated a deal with the opposition parties last weekend that watered down his tax cuts, while beefing up some of the welfare and employment changes.

This is a signal that Germany is on the move. Our country is resolutely taking on the challenges posed by the 21st Century Gerhard Schroeder

Twelve members of his own Social Democrat Party (SPD) and the coalition Green Party defied Mr Schroeder's calls for unity and voted against one of the proposals to put increased pressure on the jobless. But it was not enough to defeat the measure.

They had earlier grumbled about an "Americanisation" of the labour market.

The tax cut, originally due in 2005, will come into force in January next year. Mr Schroeder says it will be financed through fresh borrowing, privatisations and reductions in government subsidies.

Tough on unemployed

Other reforms will force unemployed people to accept jobs they may not want to take.

Presenting the measures to the lower house, the chancellor said: "This is a signal that Germany is on the move. Our country is resolutely taking on the challenges posed by the 21st Century."

The reform package backed by the houses of parliament includes:

• an overhaul of Germany's comprehensive network of job centres
• enabling companies with up to 10 employees to lay off workers more easily
• making long-term jobless accept jobs offered to them or lose 30% of their benefits
• an overall cut in welfare payments
• reducing tax breaks and subsidies for homebuyers, commuters, farmers and others
• a rise in tobacco taxes - increasing the cost of a pack of 19 cigarettes by 23 euro cents

Mr Schroeder said he was prepared to discuss a simplified tax structure proposed by Christian Democrat (CDU) finance spokesman Friedrich Merz.