Uruguay's leftist president, Jose Mujica, defends his initiative as a bid to regulate and tax a market that already exists but is run by criminals.
"We've given this market as a gift to the drug traffickers and that is more destructive socially than the drug itself, because it rots the whole of society," the 78-year-old former guerrilla fighter told Argentine news agency Telam.
Not all convinced
Uruguay is one of the safest Latin American countries with little of the drug violence or other violence seen in countries such as Colombia and Mexico.
(Read more: Mexico: Wake up tothe emerging market next door)
Yet one-third of Uruguay's prison inmates are serving time on charges related to narcotics trafficking that has turned Uruguay into a transit route for Paraguayan marijuana and Bolivian cocaine.
Even though it is set to clear the Senate, the legislation faces fierce opposition from conservatives and Mujica has yet to convince a majority of Uruguayans that it is a good idea.
According to a recent opinion poll by Equipos Consultores, 58 percent of Uruguayans oppose legalizing pot, although that is down from 68 percent in a previous survey in June.
Critics say legalization will not only increase consumption but open the door to the use of harder drugs than marijuana, which according to government statistics is used by 8 percent of Uruguayans on a regular basis.
"Competing with drug traffickers by offering marijuana at a lower price will just increase the market for a drug that has negative effects on public health," said Senator Alfredo Solari of the conservative Colorado Party.
(Read more: Deadly epidemic: Prescription drug overdoses)
If it works, the legislation is expected to fuel momentum for wider legalization of marijuana elsewhere, including the United States and in Europe. Decriminalization of all drug possession by Portugal in 2001 is held up as a success for reducing drug violence while not increasing drug use.
"This development in Uruguay is of historic significance," said Ethan Nadelmann, founder of the Drug Policy Alliance, a leading sponsor of drug policy reform partially funded by Soros through his Open Society Foundation.
"Uruguay is presenting an innovative model for cannabis that will better protect public health and public safety than does the prohibitionist approach," Nadelmann said.