Describing the current system as "broken", the President laid out the most sweeping changes to immigration laws in nearly 30 years during an address at the White House.
The plan would mean migrants living illegally would be given work permits to save them from being ejected from the country - although it would leave millions more in limbo.
Under the changes, those who had been in the US for at least five years would be able to apply legally for jobs and join American society, but not vote or qualify for insurance under the president's healthcare law.
An additional 270,000 people would be eligible for relief under the expansion of a 2012 move by Mr Obama to stop deporting people brought illegally to the US as children by their parents.
The President said that in the absence of cross-party consensus on reform, he would use executive powers in the same way his predecessors had in order to force the changes through.
He added that they would also include giving border staff more resources to "stem the flow of illegal crossings and speed the return of those who do cross over".
He said they would make it "easier and faster for high-skilled immigrants, graduates and entrepreneurs to stay and contribute to our economy".
He argued that America should be helping those who worked hard, often for low wages in difficult jobs, shared American values and wanted to participate in society, while at the same time cracking down on criminals.
"Tracking down, rounding up and deporting millions of people isn't realistic. Anyone who suggests otherwise isn't being straight with you," he added.
"It's also not who we are as Americans."
He appealed to his Republican opponents, who control Congress after success in the mid-term elections, to put aside "politics as usual" and pass new laws to tackle the issue.
"To those members of Congress who question my authority to make our immigration system work better, or question the wisdom of me acting where Congress has failed, I have one answer: Pass a bill," Mr Obama said.
However, the measures are likely to infuriate the newly emboldened Republicans, some of whom have accused him of in effect offering an amnesty.
"The President will come to regret the chapter history writes if he does move forward," said Mitch McConnell, the Republican who is soon to become the Senate majority leader, hours before Mr Obama's speech.
Republicans were united in opposing his move but could not agree on how to respond.
Options mooted include lawsuits, a government shutdown and even impeachment.
However, leaders are aware a shutdown could backfire, and anger voters ahead of the next presidential election in two years' time.
