The bill extends the normal tenure of a Lebanese president, but offers Lahud only three more years in office instead of the usual six.
The controversial bill, which would amend Article 49 of the constitution to enable the favourite of neighbouring power-broker Syria to stay on, must now be submitted to parliament, which will vote in a special session to be held between 24 September and 24 November.
Information Minister Michel Samaha has said on Saturday the amendment will allow Lahud to occupy the top post until 23 November 2007, if he is re-elected by parliament.
There are a number of other candidates in the running.
Buoyed by Syria's backing, Lahud has made it clear he is willing to stand for another term, despite widespread opposition to the constitutional amendment that will permit it.
Syria's political influence in Lebanon, where it has thousands of troops, means it can count on a majority of members of parliament.
But Washington has voiced its opposition to another term for Lahud, saying it would violate the country’s constitution.
Prime Minister Hariri (R) opposes
a second term for Lahud (L)
US State Department spokesman Adam Ereli said on Thursday Washington supported a free and fair electoral process in Lebanon, but in accordance with the already established Lebanese constitution.
"That constitution provides for a new president every six years, selected by parliament,” said Ereli.
The United States, Germany and Britain have also come out against the move.
Domestically, a large number of religious and political figures are also opposed to Lahud's re-election.
Prime Minister Rafiq al-Hariri, who too opposes a second term for Lahud, met in Damascus Syrian President Bashar al-Asad on Thursday. And on Friday night, he held talks with the head of Syrian military intelligence in Lebanon, General Rustum Ghazali.
The cabinet approved the bill, as had been widely expected, in a special session that lasted only 20 minutes.
In an interview with Aljazeera, the Lebanese minister of state, Abd Al-Rahim Murad, explained the background of the cabinet's decision.
"Unanimity is obtained in the following ways: by public referendum; a unanimous decision by parliament; by public polling," he said.
"In this case, the poll was carried out by a French institute and the results proved that President Lahud has more support than other candidates".
However, Murad declined to divulge details of the survey or the name of the institute that he said had conducted it.
Questioned on relations between Lahud and Prime Minister al-Hariri, Murad was evasive.
"We should wait for the approval of a term renewal from parliament and for decisive parliamentary elections next April," he said.
Close ties: Lahud (L) with Syrian
Foreign Minister Faruq al-Shara
In the last nine years, two constitutional amendments concerning the presidency have been sought by Syria and voted through parliament.
In 1995, the presidential term of Ilias Harawi was extended for three years.
And in 1998, Lahud was able to stand for president after the rules were changed because he had not resigned as head of the armed forces within the allotted time frame to be eligible.
In an interview with Aljazeera, Dr Faris Said, member of the Lebanese House of Representatives said: "I believe the cabinet's decision is a set back for Lebanon and Syria, and can be called a 'black Saturday' in the contemporary history of independent Lebanon."
Said accused Syria of seeking to deny the Lebanese people their right to respect their constitution and uphold their laws, and blamed the Lebanese cabinet for "carrying out orders from Damascus".
"We will seek to highlight that the Lebanese public opinion is in fact against the cabinet's decision which was actually made in Damascus," he told Aljazeera.
"We will use every democratic avenue to express our opposition," he added.
But Media adviser to Lahud, Rafiq Shalala said the extension was an indication of the "support" that the president has.
"The approval of the amendment by the government, which includes ministers representing major parliamentary blocs, gives a clear indication of the size of support (for Lahud) in the parliament," Shalala told Aljazeera.