The White House reached agreement on formally banning cruel, inhumane or degrading treatment of foreign terrorism suspects.
It follows bipartisan pressure and a push by Senator John McCain for an amendment to a military spending bill.
Senator McCain is a Vietnam veteran who spent time in a PoW camp.
Both houses of Congress passed the bill despite President Bush’s threat to veto any legislation limiting interrogation tactics.
The White House had sought protections for CIA interrogators accused of violating the rule.
But Senator McCain rejected that, saying it would undermine his amendment.
The move is seen as an embarrassment for Mr Bush, with the Senate and the House of Representatives both controlled by Republicans.
But he has maintained that there will be protections for US forces and that the move sends a clear signal that America does not torture prisoners.
“We’ve been happy to work with him to achieve a common objective and that is to make it clear to the world that this government does not torture and that we adhere to the international convention of torture, whether it be here at home or abroad,” said Mr Bush.
“And so we have worked very closely with the senator and others to achieve that objective, as well as to provide protections for those who are on the front line of fighting the terrorists.”
Senator McCain said that during negotiations, there were legitimate concerns raised by the administration concerning the rights of interrogators.
He added that the new law would provide certain protections when it could be reasonably shown that an interrogator was carrying out orders.
The Bush administration has been hammered by scandal over the sexual and physical abuse of detainees by US soldiers at Abu Ghraib prison in Iraq.
Its record has also been tainted by harsh interrogations at US facilities at Guantanamo Bay, Cuba, and reports that the CIA has run a network of secret foreign prisons to hold terrorism suspects.