Lawmakers have long wanted the company to pre-screen militant speeches and propaganda videos, but the company wants to protect First Amendment rights, the Los Angeles Times reported.
YouTube will now allow users to decide if such video uploads promote terrorism and should be removed.
Sen. Joe Lieberman, Ind-Conn., has long called for YouTube to remove content produced by Islamic extremists. He said the decision to let users decide if material should be removed from the site is progress.
Lieberman said new flagging protocols are a "good first step toward scrubbing mainstream Internet sites of terrorist propaganda."
"But it shouldn't take a letter from Congress or, in the worst possible case, a successful terrorist attack, for YouTube to do the right thing," Lieberman said.
YouTube removed hundreds of videos featuring American cleric Anwar Awlaki in November. U.S. officials called Awlaki a "global terrorist."
Jeffrey Rosen, a law professor at George Washington University, said YouTube's new approach is "potentially troubling."
He said the phrase "promotes terrorism" is more subject to interpretation than YouTube guidelines specifically forbidding the publication of material that incites others to commit violence.