In an attempt to keep the "NGO transparency" bill alive, Prime Minister Benjamin Netanyahu has removed a section that requires activists representing foreign-funded human rights organisations to wear special identifying tags in the Knesset.
Mr Netanyahu said that the law, proposed by Justice Minister Ayelet Shaked, should be "comparable to American legislation" on NGOs which receive funding from other countries.
Under the new law, should it pass, non-profit groups that receive over half their funding from foreign governments will have to declare this information on their official publications.
The Israeli left and human-rights community has accused the government of discrimination, as the law does not require the same disclosure from groups receiving foreign funding from private sources.
While many groups identified with the left receive significant funding from the US and a variety of EU governments, including Britain, NGOs on the Israeli right are often funded by Jewish and Christian evangelist donors from abroad.
The proposed amendment is partly an admission that the government will find it difficult to pass the law through the Knesset. Pressure to drop the bill has come from several coalition members, not to mention the Obama administration and EU members.
Other recent proposals for legislation seen as curtailing democratic rights have been drastically watered down or "buried" in committees.
This is expected to be the fate of another proposal from Jewish Home MK Shuli Mualem, who last week tabled a law that would outlaw Breaking the Silence, the group of former Israeli combat soldiers that publishes alleged human rights breaches by the IDF.
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