The government-drafted bill, which won preliminary approval in parliament on Saturday, eliminates imprisonment as a penalty for some media offences, but continues to allow judges to impose jail terms for journalists in many others.
The opposition said the bill was another blow for reform in Egypt and showed the insincerity of pledges by Hosni Mubarak, the president, to allow more political freedoms and end custodial sentences for publishing offences.
Twenty-five daily and weekly papers observed the boycott on Sunday. State-owned papers went to print as normal.
Chief among the objections of opponents of the law is a provision allowing the jailing of journalists who allege financial corruption by officials or state employees.
Also on Sunday, hundreds of journalists demonstrated outside the parliament.
Journalists, deputies opposing the bill and members of the opposition group Kefaya (Enough), gathered outside the main entrance of the building in downtown Cairo holding banners reading "For the sake of freedom of opinion, wake up Egypt."
"This protest is a clear message to parliament to refuse the draft bill which restricts freedom instead of removing constraints," Gamal Fahmy, a member of the Journalists' Syndicate, told AFP.
Yahya Kalash, the Journalists' Syndicate secretary-general, told Reuters: "This is an addition which hinders the press from performing its role in criticism and uncovering corruption. It gives a form of protection to corruption."
Journalists protest outside the
parliament in Cairo
The bill also increases the maximum fines that can be imposed on reporters for offences such as libel.
"The amendments limit press freedom," said Magdy el-Galal, the editor of Egypt's most prominent independent daily, al-Masry al-Youm.
Parliament is dominated by the ruling National Democratic Party. The opposition Muslim Brotherhood, which holds nearly a fifth of the seats in the chamber, has objected to the law.
Mohammed Habib, deputy leader of the Brotherhood, said: "It's a retreat from the promise of the president for political reform and shows the absence of a real desire for political reform. The main aim is to silence the opposition."
The government pushed a judiciary law through parliament last month despite criticism by judges and the opposition who said the bill did not guarantee independence for judges from the executive.
Meanwhile police arrested 27 members of the Brotherhood gathered at a Mediterranean resort, the interior ministry said in a statement on Sunday.
The ministry said that the men were meeting to discuss political activities in the teachers' professional association, but a Brotherhood member said they were on a holiday arranged by the group.
A statement from the interior ministry said the detainees were in charge of the group's "secret activities" in 19 provinces and are connected to the Brotherhood's central committee. They were arrested in Ras el-Barr, 160km northeast of Cairo.
Up to 700 members were arrested in spring along with dozens of secular activists in conjunction with protests supporting calls for an independent judiciary from two reformist judges. Last week, the group said that several hundred of its members remain in custody.