The government has buckled to months of strikes and protests that drew millions into the streets to contest First Employment Contract (CPE), which would have made it easier to fire young people.
The law will be replaced by new state subsidies to encourage companies to take on unqualified young staff.
The vote was approved by 151 votes to 93, in a lower house dominated by the ruling centre-right Union for a Popular Movement (UMP), and will be examined by the upper house Senate on Thursday.
President Jacques Chirac bowed to two months of protests by agreeing to replace the contested measure, which would have allowed employers to fire under-26-year-olds without motive in the first two years.
Instead, companies will be granted subsidies for recruiting 16-25 year olds with low qualifications, or coming from one of 750 disadvantaged neighbourhoods, many of which were hit by youth riots last November.
The measures are set to cost 450 million euros or A$752 million over two years, according to government estimates.
’Lost months’
"It took three months of mobilisation, by parliament, workers and students, for the government and majority to realise they were heading down a blind alley," said the Socialists' parliamentary leader, Jean-Marc Ayrault.
"These were three lost months, but in future nothing will be the same again: for a prime minister to decide things alone and without negotiating with unions, that is finished."
Prime Minister Dominique de Villepin has faced tough criticism for introducing the CPE without consulting trade unions, with even his own camp acknowledging his method may have set back future reforms until after next year's presidential election.
Within the centre-right, the debacle has brought about a power shift that is expected to weigh on next year's vote, with both Chirac and his protege and chosen successor Mr de Villepin seen as badly weakened.
Mr Chirac told his weekly cabinet meeting he had acted in order "to get out of a situation of blockage and to keep moving forwards on the fight against unemployment".
"I wanted this out of concern for order and appeasement," he was quoted as saying by the presidency.
Several thousand students staged protests across the country on Tuesday, determined to wring more government concessions on employment.
Emboldened by their success, some students have set their sights on a repeal of the entire law on equal opportunities, as well as a similar New Employment Contract (CNE) introduced last year for employees of small companies.
However several French universities have voted to end their weeks-long protest movement. Students at universities in Grenoble in the southeast and Nancy in the east, both hotbeds of students resistance to the jobs scheme, voted to end their blockade of classes at their faculties.
Seventeen universities remained disrupted to some degree on Wednesday, with two, in southern Montpellier and Toulouse, closed down entirely.
But student protests have been winding down since the government's climbdown over the CPE, and are expected to fizzle out with the start of the Easter holidays, which have already begun in part of the country.