President Abdel Fattah al-Sisi is expected to approve the law this week, after pledging tough measures against militants who have bedevilled the country since the army's ouster of his Islamist predecessor Mohamed Morsi in 2013.
The former army chief has led an extensive crackdown on the Islamist opposition and militants, vowing to eradicate Morsi's Muslim Brotherhood movement and jihadists.
But one year into Sisi's rule, his government was stunned by the assassination of state prosecutor Hisham Barakat on June 29.
"It's a disaster to see the state pass such a law in an atmosphere charged with calls for revenge," said Gamal Eid, a lawyer who heads the Arabic Network for Human Rights Information.
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Article 33 of the cabinet-approved draft law stipulates a minimum two-year prison sentence for anyone who reports casualty tolls from militant attacks that stray from government figures.
The law came partly in response to coverage of militant assaults on soldiers in the Sinai on July 1.
"This is a dangerous article that violates the constitution," the Egyptian Journalists Syndicate said in a statement.
"It violates the reporter's right to seek information from various sources... It allows the executive authorities to act as censors, and the judges of truth," it said.
Government officials say the wording of the provision requires proof of "intent" and "malice" when reporting figures that contradict official statements.
"The government has a duty to protect citizens from false information," Justice Minister Ahmed al-Zind told AFP, arguing that the law should not be seen as "a restriction on media freedoms".