|Protesters held a demonstration against the new law outside |
the parliament building in Vienna on Tuesday
Austria's Integration Minister, Sebastian Kurz, defended the reforms but Muslim leaders say they fail to treat them equally.
The 1912 law made Islam an official religion in Austria.
It has been widely held up as a model for Europe in dealing with Islam.
The new measures, first proposed three years ago, include the protection of religious holidays and training for imams.
But Muslim groups say the ban on foreign funding is unfair as international support is still permitted for the Christian and Jewish faiths.
They say the legalisation reflects a widespread mistrust of Muslims and some are planning to contest it in the constitutional court. Oh no! Not that! A mistrust of Muslims - how could that possibly be?
Mr Kurz told the BBC the reforms were a "milestone" for Austria and aimed to stop certain Muslim countries using financial means to exert "political influence".
"What we want is to reduce the political influence and control from abroad and we want to give Islam the chance to develop freely within our society and in line with our common European values," he said.
|A mosque is pictured against mountains in the Tyrolean village of Telfs|
in western Austria
Meanwhile the legislation has drawn wide reaction from Muslims across the world, with Turkey's head of religious affairs, Mehmet Gormez, adding his condemnation on Tuesday.
"Austria will go back 100 years in freedom with its Islam bill," Mr Gormez said, according to Turkey's state-funded Anadolu news agency. Islam goes back a thousand years with Sharia - is that better?
Roughly half a million Muslims live in Austria today, around 6% of the population. Many of them have Turkish or Bosnian roots.
The Islam law was introduced by Habsburg Emperor Franz Joseph (pictured left) in 1912.
Franz Joseph was uncle to Archduke Franz Ferdinand, heir to the throne, who's assassination triggered World War I.
The parliamentary vote in Austria came as the French government announced plans to improve dialogue with France's Muslim community.
French Interior Minister Bernard Cazeneuve said the government would increase consultations with Muslim leaders.
It would also double the number of university courses for imams - making them obligatory for Islamic chaplains in prisons and the armed forces - to ensure they are "faithful to the values of the Republic", he said. That should be interesting!