The legislation was approved by a vote of 82 to 62 in the House of Representatives. It was passed by the Senate last month.
Supporting the legislation, Defense Minister Brendan Nelson said his generation had benefited enormously from the scientific endurance and judgment of those who pioneered difficult research and legislation.
"We owe it to the next generation no less to show the same wisdom and indeed the same courage," Nelson said.
The party leaders were among the final speakers in a divisive debate which began in the lower house Monday.
"I've decided to vote against this legislation for the reason that in the end you have to take a stand for some absolutes in our society," Prime Minister John Howard told Parliament. "And I think what we're talking about here is a moral absolute and that is why I can't support the legislation."
Opposition Labor Party Leader Kevin Rudd later said he had similarly wrestled with his conscience over the legislation and decided he could not support it.
"I find it very difficult to support a legal regime that results in the creation of a form of human life for the single and explicit purpose of conducting experimentation on that form of human life," Rudd said.
Deputy Prime Minister Mark Vaile, leader of the Nationals party, and Peter Costello, Howard's deputy in the ruling Liberal Party, also gave their reasons for voting against the bill. There are no other parties represented in the 150-seat lower chamber.
All parties encouraged their lawmakers to vote according to their consciences rather than following party lines. A conscience vote is rare in Australian politics.
"We must not attempt to achieve good ends through what I believe are immoral means," Vaile said.
The House of Representatives debate came after the legislation narrowly passed through the Senate by a 34-32 vote on Nov. 7.
Scientists hope stem cell research will eventually lead to treatments for conditions including Parkinson's and Alzheimer's, as well as spinal cord injuries, diabetes and arthritis.
Parliament passed Australia's first laws on stem cell research in 2002, allowing scientists to extract stem cells from spare embryos intended for in vitro fertilization but preventing cell cloning.
The bill passed allows for therapeutic cloning, the splicing of skin cells with eggs to produce an embryo from which stem cells - also known as master cells, which are capable of forming all the tissues of the human body - can be taken.
The government senator who drafted the bill, former Health Minister Kay Patterson, said the law would come into effect in six months after health and science authorities draft guidelines for egg donation and research licenses.
"It will enable Australia to stay at the forefront of medical research," Patterson told reporters after the vote.
"This work's being done in Sweden, England, the United States, in Japan ... and my view was I didn't see how we could accept any treatment derived from this in the future if we didn't allow the research here in Australia," she added.
She said she believed the legislation could be made more liberal and, by law, must be reviewed after three years.
"At some point people will say 'We don't believe the means justify the ends,"' Patterson said. "At the moment, the Parliament has said: 'That's not the case."'