Embraced by Hispanics, his action touched off an election-year confrontation with many Republicans.
Obama said the change would become effective immediately to "lift the shadow of deportation from these young people."
"Let's be clear, this is not amnesty, this is not immunity, this is not a path to citizenship, this is not a permanent fix," Obama said from the White House Rose Garden. "This is the right thing to do."
The administration said the change will affect as many as 800,000 immigrants who have lived in fear of deportation.
It bypasses Congress and partially achieves the goals of the "DREAM Act," legislation that would have provided a pathway to citizenship for young illegal immigrants who went to college or served in the military.
Under the administration plan, illegal immigrants will be able to avoid deportation if they can prove they were brought to the United States before they turned 16 and are younger than 30, have been in the country for at least five continuous years, have no criminal history, graduated from a U.S. high school or earned a GED or served in the military. They also can apply for a work permit that will be good for two years with no limits on how many times it can be renewed.
The move comes in an election year in which the Hispanic vote could be critical in swing states like Colorado, Nevada and Florida. While Obama enjoys support from a majority of Hispanic voters over Republican challenger Romney, Latino enthusiasm for the president has been tempered by the slow economic recovery, his inability to win congressional support for a broad overhaul of immigration laws and by his administration's aggressive deportation policy.
Republicans nationwide strongly criticized the Obama action.
"I think this is an insult to legal immigrants who come here and try to do it the right way," said Assemblyman Tim Donnelly, R-Hesperia. "It's the wrong message to be sending when we have the highest unemployment of young people since World War II."
But the response from Romney was more muted.
Romney said Obama's decision will make finding a long-term solution to the nation's immigration issues more difficult. But he also said the plight of illegal immigrants who were brought to the U.S. as children is "an important matter to be considered."
During the Republican presidential primaries, Romney said he would veto the DREAM Act with its pathway to citizenship.
Obama's new policy tracks a proposal being drafted by Republican Sen. Marco Rubio of Florida, a potential vice presidential running mate for Romney, as an alternative to the DREAM Act, formally the Development, Relief and Education of Alien Minors Act.
The change in enforcement policy, to be carried out by the Department of Homeland Security, comes one week before Obama plans to address the National Association of Latino Elected and Appointed Officials' annual conference in Orlando, Fla. Romney is to speak to the group on Thursday.
"It is important that our immigration laws take into consideration the individual circumstances of each person," said Rep. Joe Baca, D-San Bernardino.
"These productive young people want to contribute to our society. They are hard working individuals who have lived in the United States for many years and want to achieve the American Dream just like everyone else."
Neither House Speaker John Boehner nor Senate Republican leader Mitch McConnell addressed the issue, underscoring the difficulty for Republican leaders as they walk a fine line of trying to appeal to the nation's fastest-growing minority group while not alienating their conservative base.
Many Republicans, including Romney, say they want tighter border security measures before they will consider changes in immigration law. Romney opposes offering legal status to illegal immigrants who attend college but has said he would do so for those who serve in the armed forces.
Praise for the new policy was also swift.
"You hurt people more by keeping them in the shadows, and it's a net benefit when you can have someone who can be entrepreneurial, gain an education and contribute the the economy," said Adrian Pantoja, Pitzer College political science professor.
William Perez, professor at the school of educational studies at Claremont Graduate University, agreed with Pantoja.
"Any one of these undocumented immigrants are going to start businesses and those businesses are going to employ American citizens," Perez said.
"To just characterize that they are taking jobs away from legal residents is too simplistic and misleading."
Obama in the past has resisted pressure to use his executive authority to relax deportations in such a broad manner. The administration had been reviewing deportations on a case-by-case basis, and officials said they concluded that by using the same authority they could help a larger swath of immigrants while at the same time helping unclog immigration courts.
The Associated Press and Staff Writer Neil Nisperos contributed to this report.