Syria's government has approved the lifting of a draconian, decades-old emergency law in the most important concession yet made by the embattled president, Bashar al-Assad, after a month of unrest.

Security forces again opened fire on demonstrators in Homs, Syria's third largest city, in the early hours of Tuesday morning after more than 5,000 anti-government protesters took over the main square on Monday night, emulating demonstrators in Cairo and Bahrain by vowing to stay until their demands for change were met.

The centre of Homs, which is north of Damascus, was described as a ghost town, with shops, markets and schools closed in the city of around 700,000 people where 17 protesters were killed on Sunday night.

In the absence of major protests in Damascus and Aleppo in the north, gaining a foothold in Homs would be significant for Syria's pro-democracy movement.

Activists have drawn inspiration from counterparts in Egypt, where Tahrir Square in Cairo became a focus for weeks of protest that brought down President Hosni Mubarak.

Syria's official Sana news agency said the government had also approved abolition of the state security court, which handled trials of political prisoners, and had passed a law allowing peaceful protests.

The emergency law requires Assad's signature to take effect, but that is expected to be a formality.

"I think this will be done in the coming few days," said Razan Zeitouneh, a lawyer in Damascus.

The Foreign Office said the abrogation of the emergency law was "a step in the right direction" but it was "only one part of a wider package of necessary reforms. The Syrian authorities should do more to ensure the Syrian people experience real political progress without delay."

Lawyers and protesters told the Guardian that the moves were not enough. "If it had been made earlier, it might have made a difference," said one activist in Damascus. "But now we have seen the regime for what it is."

Haitham Maleh, a former judge, said: "This [announcement] is all just talk. The protests won't stop until all the demands are met or the regime is gone."

Syria's ubiquitous security services are immune from prosecution under a law passed in 2008. It was reported that a prominent leftist in Homs, Mahmoud Issa, was taken from his house around midnight by members of Syria's feared political security division.

Reports suggest the new law to regulate protests still gives the government considerable scope to decide when a protest is legal. Stringent anti-terrorism legislation is expected to enacted soon.

Protesters have been increasingly angered by the government's policy of disinformation. In an ominous sign, the government said on Monday that it was now facing an "armed insurrection" by Salafists – fundamentalist Sunnis who are equated by many with al-Qaida.

"It is a ridiculous and dangerous comment," said Rime Allaf, a Syrian analyst at the Chatham House thinktank in London. "How many 'armed insurrections' have you seen sit in a square and wait to be gunned down?"

Diplomats and analysts in Damascus said they feared the move to implicate "terrorists" would be used to justify a harsh crackdown.

Syria's government has often invoked the threat of Islamism to justify its hardline policy on internal dissent.

The country has large minorities of Christians and Druze, and the fear of sectarian violence is often cited as an argument against too much political freedom.

Conservative Sunni groups have represented the biggest challenge to the Ba'ath regime since it took power in 1963, when the emergency law came into force, prompting a hard line by the government throughout the 1970s and 80s, culminating in the notorious Hama massacre of 1982 in which at least 10,000 died.

Such a violent reaction may be less likely in the age of Twitter and YouTube, but the violence in Homs has heightened fears among protesters.

A small protest was held at Damascus University's faculty of medicine on Tuesday, just hours after the government had warned protesters not to take to the streets after security forces opened fire on demonstrators in Homs.

Witnesses said the security forces had closed off the Clock Square in Homs and fired into the air and crowds.

"People were running away from the square but the security forces chased them, beat and detained them," said a man who identified himself as one man, Anwar al-Omar. "Many people are missing and we don't know if they were killed, detained or are hiding somewhere."

He added that security forces opened fire again after protesters attending funerals on Tuesday threw shoes at security forces, although no fatalities were reported. Rights groups said at least one person was confirmed dead.

Syrians have been increasingly drawing parallels with the 1980s, pointing to the heavy-handed tactics of the government including shootings and arrests, as well as the deaths of army officers, which the government claims were due to armed criminal groups.

Katherine Marsh is a pseudonym for a journalist living in Damascus