The issue is of particular importance to the Jewish community in the United States, where the more liberal Reform and Conservative streams of Judaism are dominant.
Israeli Prime Minister Benjamin Netanyahu pushed the plan in an attempt to please American Jews, a key source of support for Israel, despite stiff opposition by ultra-Orthodox and religious nationalist elements in Israel who are key members of his own government.
"I know this is a sensitive topic, but I think it is an appropriate solution, a creative solution," Netanyahu said at the start of today's Cabinet meeting, where members voted on the plan.
The Jewish Federations of North America, an umbrella group of Jewish communities, issued a joint statement with the Reform and Conservative movements calling the decision a "dramatic, unprecedented and critical acknowledgement" by Israel that the holy site should incorporate liberal Jewish prayer traditions.
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"Though much work regarding the implementation of this decision still remains, it is because of our perseverance and commitment to Jewish peoplehood that we are measurably closer today to the ultimate symbol of that reality - one wall for one people," the statement read.
The site is administered by ultra-Orthodox rabbinic authorities, who have a monopoly over religious affairs in Israel.
There are separate men's and women's prayer sections and non-Orthodox prayer, like mixed-gender services and women-led prayers, are forbidden.
A leading women's prayer group, Women of the Wall, caused controversy for years by holding monthly non-Orthodox prayers at the site.
Police arrested women carrying Torah scrolls and wearing religious articles traditionally reserved for men, practices ultra-Orthodox Jews oppose and consider a provocation.
The Reform and Conservative movements of Judaism have supported the group's cause and demanded representation at the holy site.