Critics say the measure will in effect give amnesty to Amazonian land dwellers who hold no legal titles to the land they claim.
But the government thinks the bill, called Provisional Measure 458, is a way to solve violent land disputes in the Amazon area and to prevent illegal deforestation.
Lula has criticized detractors and says he simply wants to settle the uncertainties of hundreds of thousands of small farmers by giving them ownership of land "to see if we can end the violence in this country."
The bill will hand over 259,000 square miles of state-owned Amazon rainforest to private hands.
Rights groups think the move will send a signal that crime goes unpunished in the Amazon.
Critics also say that new amendments to the bill that were inserted by Congress will actually encourage deforestation by allowing buyers to sell on their properties to big landowners and exploitation industries.
Early drafts of the measure stated that the largest territories would go up for auction at market prices, and buyers would be given 20 years to pay. But conservation groups point out that Congress made a later amendment permitting the land to be resold after only three years.
Environmentalists say this will encourage speculators to buy up estates in order to quickly turn them over to the highest buyers, which are likely to be large mineral and logging companies.
They also say that the government's inability to verify the status of buyers or to track real estate deals opens up the possibility that lands will be registered by front companies or middlemen acting on behalf of wealthy landowners.
The measure rules that medium-sized areas will be sold for a token sum, while the smallest parcels of land (less than 100 hectares, or 247 acres) would be given for free.
In a separate plan, specifically meant to slow rainforest degradation, Lula announced last Friday that his government would pay small farmers to plant trees in heavily deforested parts of the Amazon.
Called the "Green Arch" proposal, small farmers will be paid up to $51 per month to reforest degraded lands, he said, without giving further details.
The government claims that it has successfully reduced deforestation to its lowest level in 20 years, but that its target is to reduce deforestation by 70 percent by 2018.