The move, dubbed a "defensive referendum" clause, was passed by 108 votes to 82 on Thursday.
Rattling sabres across the Taiwan Strait on Wednesday, Beijing had said it would "make a strong response" if Taipei passes a referendum law without restrictions, although it stopped short of firing new threats, a week after a Chinese general spoke of possible war.
Despite the warnings from China, MPs went further, voting 114 to 96 to approve a controversial clause in the referendum bill proposed by the opposition Kuomintang and the People First Party which would allow the constitution to be changed.
More clauses to come
The parliament was still debating other controversial clauses in the bill which would allow referenda to be held on even more contentious issues such as changing the country's name and flag.
Although Taiwan functions as an independent country, most of the international community recognises the island as part of Chinese territory and Beijing repeatedly warns it will use force to prevent Taiwan's independence.
"If in two days Taiwan passes an unlimited law and creates a legal basis for Taiwan independence, there is no question that we will come up with a strong reaction," said Taiwan Affairs Office spokesman Zhang Mingqing.
The threat was rejected by Taiwan's ruling Democratic Progressive Party (DPP) and opposition parties, which called on Beijing to stop bullying the people of Taiwan.
The two major opposition parties in Taiwan, the Kuomintang (KMT) and People First Party (PFP), have promised to push through the bill on Thursday even if parliamentary debate stretches late into the night.
"If in two days Taiwan passes an unlimited law and creates a legal basis for Taiwan independence, there is no question that we will come up with a strong reaction"
Chinese Taiwan Affairs Office spokesman
The political uncertainty and rhetoric from Beijing spooked the markets on Thursday, with share prices falling over two percent.
Analysts say the referendum issue, long a taboo subject in Taiwan because of fears it would upset the delicate status quo, is being used by all the political parties to drum up support ahead of next year's presidential elections.
China's state media called Taiwan's President Chen Shui-bian a troublemaker on Thursday and said he was bringing disaster to the island.
"Chen, as a troublemaker in international society, damages the fundamental interests of Taiwan compatriots and brings disaster to Taiwan," the official Xinhua news agency quoted an article slated to run on Friday in a key Communist Party newspaper as saying.
The Guangming Daily article, written by a history scholar, pointed to various agreements at the end of World War II as proof of Beijing's assertion that Taiwan belongs to China, Xinhua said.