Although several cities in Latin America already have gay civil union laws on the books, Uruguay is the first to recognise same-sex civil unions countrywide.
Located on the southeastern coast of South America, Uruguay has a population of 3.4 million of which 62% is Roman Catholic.
Under the new law, gay and straight couples will be eligible to form civil unions after living together for five years. They will have rights similar to those granted to married couples on such matters as inheritance, pensions and child custody.
Couples must register their relationship with authorities and will be able to formalise the end of a union.
The Catholic Church has expressed its opposition to gay marriage and calls upon Catholic politicians to oppose it.
In 2003, the Argentinean capital of Buenos Aires became the first Latin American city to legalise same-sex unions but without adoption and inheritance rights. Since then, Mexico City, the northeastern Mexican state of Coahuila in Mexico and the southern Brazilian state of Rio Grande do Sul have approved same-sex unions.