The Senate about-face came amid political tensions between Morales and the opposition. Civil society leaders in eight of nine provinces have called for a general strike on Friday.
Government officials said that large landowners from the eastern region of Santa Cruz, the country's agricultural heartland and a bastion of the conservative opposition, had been behind the Senate protest.
Evo Morales, Bolivia's leftist president, told the protesting landless Indians this week that he would issue a presidential decree to redistribute idle land to poor peasants if the boycott continued.
Morales' "land reform", a key campaign promise, aims to redistribute some 48 million acres, or almost a fifth of Bolivia's territory, within five years.
The plan, which calls for redistribution of idle land to poor peasants, enjoys widespread support.
But estate owners in Santa Cruz, where vast cattle ranches and soy plantations abound, are fearful their land might be confiscated.
Morales has ruled out mass expropriations, saying only unproductive or illegally owned land will be targeted.
But, analysts say, some of his plans are fuelling economic and racial tensions between the European-descended minority of the eastern regions and the indigenous majority that populate the Andean highlands.
Earlier this week thousands protested in the city against against the measure. The protesters also called for more autonomy from the central government.
A former opposition presidential candidate is on a hunger strike, and opposition legislators walked out of the Senate to protest against Morales' drive to control an assembly that is rewriting the country's constitution.
Landless Indians had for weeks been
staging marches in support of the bill
Dozens of indigenous activists attended the Senate session and celebrated outside the legislative palace when the bill was passed.
Morales' drive to nationalise the energy industry has enjoyed widespread political support, but his plan to redistribute what he calls idle land to the poor, indigenous majority that forms his power base had been blocked by opposition senators.
"We are not afraid to issue a decree to put an end to large estates," Morales told supporters shortly after returning to Bolivia from a two-day visit to the Netherlands, and before heading to Nigeria for a summit of African and Latin American leaders.
At the rally in La Paz on Tuesday, the crowd called for him to close the Senate, but Morales ruled this out.
I cannot close down the Senate ... those that have [already] closed it are dealing a blow to democracy," said Morales, the country's first indigenous president who gained prominence as a protest leader and head of a nationwide coca leaf growers' group.