Maldives President Abdulla Yameen has approved a law passed by parliament on Wednesday which allows foreigners to own land for the first time.
Up until now the constitution prohibited foreign ownership of any part of Maldivian territory.
But now foreigners will be allowed to buy land provided they invest more than $1bn and provided that 70% of it is reclaimed from the Indian Ocean.
Critics fear the move could enable China to set up bases in the Maldives.
The government has denied this, saying it wants foreign investment on a commercial basis.
It says that foreign investors will be able to buy 10% of the 298 square km (115 square miles) of naturally occurring land that make up the the Maldives.
It hopes that the move will attract offshore investors into special economic zones set up by President Yameen to make the economy less reliant on tourism.
But opposition MPs fear that the measure could enable China to establish bases in the strategically important Islamic republic, which lies within important international east-west shipping routes.
Correspondents say that any Chinese move into the Maldives is certain to be viewed suspiciously by India, which considers the Maldives archipelago to be within its sphere of influence.
"We can't ignore the fact there is a cold war brewing between India and China," Opposition Maldivian Democratic Party MP Eva Abdulla told the AFP news agency.
But Vice President Ahmed Adeeb rejected concern over the move, pointing out that it had been done to generate foreign investment.
"We are not going to sell land to other countries, whether it's China or Saudi Arabia," he was quoted as saying by Minivan News on Thursday.
The Maldives comprises thousands of tiny coral islands located across the equator.
It has endured considerable political unrest since its first democratically elected president, Mohamed Nasheed, was overthrown in a coup in February 2012.
There have been frequent street protests in the capital Male since Mr Nasheed was convicted earlier this year on terrorism charges.