The move applies to minors brought to the United States before the age of 16, who are currently under 30, are in school or have graduated from high school, and have not been convicted of a felony, officials said.
President Barack Obama was due to make remarks on the decision in the White House Rose Garden later on Friday.
The move will likely be vigorously protested by conservative Republicans and be seen as a bid by the president to solidify his hold on the youth and Hispanic vote that could be critical in several swing states in November.
“Our nation’s immigration laws must be enforced in a firm and sensible manner,” said Homeland Security Secretary Janet Napolitano.
“But they are not designed to be blindly enforced without consideration given to the individual circumstances of each case.
“Nor are they designed to remove productive young people to countries where they may not have lived or even speak the language. Discretion, which is used in so many other areas, is especially justified here.”
The decision will go some way to enshrining the goals of the DREAM Act, legislation backed by the White House that could lead to young illegal immigrants, brought to America by parents, gaining permanent residency.
The legislation, opposed by Republican presidential candidate Mitt Romney and conservative Republicans, has failed to pass Congress and become law.