However it watered down an earlier draft of the bill which had reportedly proposed fines of up to €600,000 ($812,000) for insulting police officers or demonstrating near parliament without permission.
The reform was being mulled as demonstrations occur regularly in Spain to protest state austerity measures required to rein in debt that has undermined
The new bill approved classifies unauthorised demonstrations near official buildings as a "serious" offence -- not a "very serious" one as earlier
proposed -- ministers said after a cabinet meeting.
Within the new system of categories, a "serious" offence is punishable by a fine of between €1,000 and €30,000 while a "very serious" offence can
yield a fine of up to €600,000.
The new bill classes insulting or threatening a police officer as a "light" offence, punishable by a fine of between €100 and 1,000 -- not a "very serious" offence as earlier planned.
It boosts fines for a range of offences, including burning bins and hiring prostitutes near schools.
The reform has sparked outrage from the political opposition, which says it threatens citizens' right to protest.
The recent years of recession and austere economic reforms by Spain's conservative government sparked mass demonstrations in the streets, including some near the lower house of parliament in Madrid that boiled over into violent clashes between protesters and police.
The new "citizen security" law was approved at a cabinet meeting and is likely to pass unhindered through parliament where the governing Popular party holds a strong majority.
Interior Minister Jorge Fernandez Diaz said the new law aimed "to strengthen the guarantee of public liberties and security".
It will "more efficiently curb forms of behaviour that constitute a threat to citizen security and which have evolved greatly over the past 22 years, as Spanish society has evolved," he told a news conference.
An official from the opposition Socialist Party, Antonio Hernando, said that even the latest version of the bill reflected an "authoritarian" tendency in the ruling party.