The move comes as Obama, a Democrat, is courting the nation's fast-growing Hispanic population while trying to win re-election on Nov. 6 against Republican Mitt Romney, who has taken a harsh stand against illegal immigration. Most U.S. illegal immigrants are Hispanics.
Under Obama's plan, those who qualify would be allowed to live and work in the United States for two years and could be eligible for extensions, the Obama administration said.
Obama has long supported measures to allow the children of illegal immigrants to study and work in the United States, but efforts to pass such measures in Congress have failed amid objections by Republicans.
The president's action sidestepped Congress and laid down a challenge to Republicans, many of whom view leniency on deportations as amounting to amnesty for illegal immigrants at a time when there are an estimated 12 million such people in the United States.
Republican lawmakers accused Obama of encroaching on Congress' authority to set laws governing U.S. citizenship.
But Obama described the move as "a temporary stopgap measure that lets us focus our resources wisely while giving a degree of relief and hope to talented, driven, patriotic young people."
While campaigning in New Hampshire, Romney said, "The president's actions make reaching a long-term solution more difficult."
Romney said he agreed with a plan advanced by Republican Sen. Marco Rubio to grant children of illegal immigrants a visa, not amnesty — a position that bears similarities to Obama's approach.
U.S. Homeland Security Secretary Janet Napolitano, who made the initial announcement, said that illegal immigrants up to 30 years old who came to the United States as children and do not pose a risk to national security would be eligible to stay in the country and would be allowed to apply for work permits.
The policy was announced a week before Obama is scheduled to address a meeting of the National Association of Latino Elected and Appointed Officials in Florida. Romney also is set to address the group next week.
Public opinion polls show Obama receiving overwhelming support from Hispanic voters compared to Romney, but the president's relations with Hispanics have been strained because of his administration's aggressive deportation of illegal immigrants.
There are up to 2 million illegal immigrants who came to the United States as children and who remain in the country, according to immigration group estimates.
The Reuters wire service contributed to this article.