The bill was approved through the country's lower senate last night and is on the verge of being passed as early as the end of this month.
If the bill is passed, Uruguayans will be allowed to grow marijuana in their own homes with limits on a maximum of six plants per house.
President Mr. Mujica is leading the movement, arguing it will allow police to concentrate more on fighting street crime and other forms of drug smuggling.
The bill will now go to the Senate to become law, where officials have told President José Mujica that they have a comfortable majority to approve it.
He argues that the legalisation of the drug will help combat street crime and drug smugglers as well as help fight other forms of drugs trafficking.
The marijuana bill has been in talks for more than a year with the 78-year old former guerilla leader Mujica winning over a large proportion of the people.
Laura Blanco, president of Uruguay’s Cannabis Studies Association, said this sent an "encouraging" sign to other latin countries: "This is a very innovative bill, with the state deciding to regulate the entire chain of production, distribution and access to the substance.”
Throughout the past year, groups have successfully turned the heads of many opposition by explaining the effective medical and economic importance of the drug.
In December last year, Prime Minister David Cameron rejected the move to decriminalise drugs in the UK: "Drugs use is coming down, the emphasis on treatment is absolutely right, and we need to continue with that to make sure we can really make a difference.
"These are the government's priorities and I think we should continue with that rather than have some very, very long-term royal commission."
Official figures last year showed that drug use in England and Wales is at its lowest rate under current measurements since 1996.
Yet the growth of legal highs is the Government's main concern.
President Mujica, who has gained the nickname "the world's poorest president" for giving 90% of his wages to charity, has been nominated for the 2013 Nobel Peace Prize for his work on drug trafficking.
Uruguay, with a population of 3.3 million people, has been at the heart of Latin America's most ambitious political movements - passing of the abortion rights law, moving towards legalising same-sex marriage and fighting for renewable energy ideas.