Brazil's president Lula has approved a controversial law which grants land rights to squatters occupying land in the Amazon — campaigners fear it will result in a further increase in deforestation of the Amazon region.

The law – known as "provisional measure 458" – is one of the most controversial environmental decisions of Lula's two terms in office, with the president coming under intense pressure from both environmental groups and the country's powerful agricultural lobby.

Marcelo Furtado, Greenpeace's campaigns manager in Brazil, said the approval of the law showed that Brazil's policy on global warming was contradictory: "On one hand Brazil is setting targets for the reduction of carbon emissions and on the other it is opening up more areas for deforestation."

Brazil's government says more than 1m people will benefit from the law, which covers 67.4m hectares of land, an area roughly the size of France. It believes the law will reduce violent conflicts by giving people private ownership of the land they live on, and will make it easier to track down those illegally felling trees.

But environmentalists – who have dubbed it the "land-grabbers bill" – fear the new rules will offer a carte blanche for those wanting to make money by destroying the Amazon. They say the law effectively provides an amnesty for those who have devastated the Amazon over the last four decades. Around 20% of the Amazon has already been lost, according to environmental campaigners, and deforestation globally causes nearly a fifth of all greenhouse gas emissions.

"This measure perpetuates a 19th century practice [of Amazon destruction] instead of taking us towards a new 21st century strategy of sustainable development," said Furtado.

Furtado said the law – originally intended to benefit impoverished farmers in the Amazon – had been "hacked apart by the agricultural lobby" and now benefited wealthy farmers rather than smaller landholders. The result, he said, was "a law which will not help increase governance [or] social justice but which simply raises the risk of more deforestation."

Under the new law, small landowners who can prove they occupied lands before December 2004 will be handed small pieces of land for free, while large areas will be sold off at knockdown rates. The government hopes this will help bring order to a region where land disputes often result in violent clashes and murder. Brazilian human rights group Justica Global, claims 772 activists and rural workers have been killed in the Amazon state of Para between 1971 and 2004.

Human rights groups also criticised the law, saying unscrupulous Amazon ranchers, who often exploit slave labour, stood to gain from the new rules.

Faced with a vocal campaign against the measure, Lula hit back, accusing "the NGOS [of]… not telling the truth."

In the decision, which came late on Thursday, Lula vetoed two of the most divisive sections of the bill – giving private businesses and absentee landowners the right to regularise their lands. But the Brazilian president gave the green light to one of the most controversial clauses, which will give new landowners the right to resell their properties after three years.