Chen signed the document in the Presidential Office witnessed by his chief aide Chiou I-jen and several parliamentarians from his Democratic Progressive Party (DPP), officials said.

"This is a historic moment...it enables us to fulfill our dream," Chen was quoted by an official as saying after he signed the bill.

"Hopefully with the enforcement of the law, the fundamental rights and universal value of referendums would be shared by the 23 million people in Taiwan," Chen said.

The new law will become effective on Friday.

Chen had pledged to hold the island's first ever referendum alongside the presidential polls on March 20, aiming to demand Beijing remove hundreds of ballistic missiles targeting the island.

Taipei has repeatedly assured Washington that the referendum in March has nothing to do with independence and is a symbol of Taiwan's fully-fledged democracy.

But the plan received a stinging rebuke from US President George W. Bush when he met with China's Premier Wen Jiabao earlier this month.

Both Japan and the European Union had also added to the pressure on Chen by voicing concern about the plan fearing it could further increase tensions across the Taiwan Strait.

Beijing, which has threatened to invade Taiwan should the island declare formal independence, called Chen "selfish" and "immoral" and vowed to "crush" any attempts by Taiwan to seek independence.