Beijing also pledged to open state-dominated industries wider to private competition and ease limits on foreign investment in e-commerce and other businesses in a sweeping reform plan aimed at rejuvenating a slowing economy.
The extent of the long-debated changes to the family planning rules and the labor camp system surprised some analysts. They were contained in a policy document issued after a four-day meeting of party leaders one year after Xi Jinping took the country's helm.
"It shows the extent to which Xi is leading the agenda. It shows this generation of leaders is able to make decisions," said Dali Yang, a China expert at the University of Chicago. "This is someone who's much more decisive, who has the power, and who has been able to maneuver to make the decisions."
Far from sweeping away all family planning rules, the party is now providing a new, limited exemption: It said families in which at least one parent was an only child would be allowed to have a second child. Previously, both parents had to be an only child to qualify for this exemption. Rural couples also are allowed two children if their first-born child is a girl, an exemption allowed in 1984 as part of the last substantive changes to the policy.
Beijing says the policy, which was introduced in 1980 and is widely disliked, has helped China by slowing population growth and easing the strain on water and other limited resources. But the abrupt fall in the birth rate is pushing up average age of the population of 1.3 billion people.
Demographers have argued that this has created a looming crisis by limiting the size of the young labor pool that must support the large baby boom generation as it retires.
"It's great. Finally the Chinese government is officially acknowledging the demographic challenges it is facing," said Cai Yong, an assistant professor of sociology at the University of North Carolina at Chapel Hill.
"Although this is, relatively speaking, a small step, I think it's a positive step in the right direction and hope that this will be a transition to a more relaxed policy and eventual return of reproductive freedom to the Chinese people," Cai said.
The government credits the one-child policy introduced in 1980 with preventing hundreds of millions of births and helping lift countless families out of poverty. But the strict limits have led to forced abortions and sterilizations by local officials, even though such measures are illegal. Couples who flout the rules face hefty fines, seizure of their property and loss of their jobs.
The update on birth limits was one sentence long, with details on implementation left to the country's family planning commission. It was unclear what might happen to children born in violation of rules, whose existence have been concealed and thus lack access to services.
Cai said some experts estimate the policy change might result in 1 million to 2 million extra births in the first few years. But he said the figure might be significantly lower because of growing acceptance of small families.
Last year, a government think tank urged China's leaders to start phasing out the policy and allow two children for every family by 2015, saying the country had paid a "huge political and social cost."
The China Development Research Foundation said the policy had resulted in social conflict and high administrative costs, and led indirectly to a long-term gender imbalance because of illegal abortions of female fetuses and the infanticide of baby girls by parents who cling to a traditional preference for a son.
The party also announced it would abolish a labor camp system that allowed police to lock up government critics and other defendants for up to four years without trial. It confirmed a development that had been reportedly announced by the top law enforcement official earlier this year but was later retracted.
Also known as "re-education through labor," the system was established to punish early critics of the Communist Party but has been used by local officials to deal with people challenging their authority on issues including land rights and corruption.
Pu Zhiqiang, a prominent Beijing lawyer who has represented several former labor camp detainees in seeking compensation, welcomed the abolition of the extra-legal system.
"There have been many methods used recently by this government that are against the rule of law, and do not respect human rights, or freedom of speech," Pu said. "But by abolishing the labor camps ... it makes it much harder for the police to put these people they clamp down on into labor camps."
"This is progress," Pu said.
Earlier this year, state broadcaster CCTV said China has 310 labor camps holding about 310,000 prisoners and employing 100,000 staff, although some estimates range higher.
The party report also promised to improve the judicial system and help farmers become city residents. It also elaborated on the party's previous announcement that it would set up a national security commission.