The EU will now create a voluntary scheme for licensing timber imports that might lead to a global agreement to clean up the $150 billion global forest product trade.
A main aim is to stop profits from the illegal logging being channelled into organised crime.
"There is a lot of concern about the use of illegally harvested timber. This sets up a licensing system for countries with which the EU has a partnership," one EU diplomat said.
"It will identify timber that is legally harvested. It's not a 100 percent solution but it's a step forward," she said.
The European Commission will open partnership negotiations with timber suppliers so the export licensing scheme can get underway. In many cases, talks are already advanced enough for licensing to begin by the end of 2006, diplomats say.
Under the plan, which has bounced around Brussels for more than two years, once a country or regional bloc has signed up to such an agreement, the EU will refuse to accept imported timber from that state unless it is certified as legal.
The 25-nation bloc is an important market for both legal and illegally harvested timber entering international trade. It is the largest importer of plywood and sawnwood from Africa and the second largest from Asia, as well as a key market for Russia.
Environmental groups say European imports of illegally felled timber are worth 1.2 billion euros ($1.43 billion) a year and the trade can lead to more forest fires and poaching.
Illegal logging costs governments of timber-producing countries between 10 and 15 billion euros, the Commission says.
The licensing plan has already been watered down. In December, the ministers failed to agree on a provision requiring paperwork showing the wood comes from approved forests because of fears it would raise administration costs.
That provision was removed, to the annoyance of green groups which also insist that binding, not voluntary, legislation is needed to outlaw the illegal logging trade worldwide.
"This (voluntary licensing) is like asking companies to voluntarily pay taxes. Legality should be a precondition for doing business, not a vain wish," said Sebastien Risso of environmental lobby group Greenpeace in a statement.