The law strips the 200-year-old Hungarian Academy of Sciences of its network of 15 research bodies and hands them over to a committee.
The committee's chairman will be appointed by Viktor Orban, the Hungary's nationalist prime minister, and half of its members will be selected by the government.
Lydia Gall, Eastern Europe and Balkans researcher at Human Rights Watch, said the law is "essentially another nail in the coffin for academic freedom and independent thought" in the country.
"This is the latest in a line of attacks on academic freedom after forcing the Central European University out of the country and banning gender studies at universities," she told The Independent.
Ms Gall said members of the academy had told her they were "all quite worried" about how the takeover could affect their research.
"There is a general fear among the scientific community that their research will be controlled by the government," she said.
Some researchers fear they will be required to provide evidence for "preconceived notions" suggested by the state committee, she said. "This goes against the whole general understanding of what an academy of sciences should be doing," she added.
She concluded: "The research that's being done by this academy is going to be extremely compromised."
Through allocating funding, the government-controlled committee could potentially cut financing for researchers working on topics such as gender studies or climate change, Ms Gall added.
Mr Orban has previously banned gender studies programmes in the country and blocked the European Union's climate change target for all of the union's member states to go carbon neutral by 2050.
Since he took power in 2010, Mr Orban's nationalist government has politicised Hungary's courts, media and universities and the European Parliament has voted to punish him for his crackdown on the country's democratic institutions.
The Central European University, which was founded by billionaire George Soros, expressed solidarity with the Academy of Sciences on Wednesday.
"The adoption of the law, following months of political pressure, threats and blackmail proffered by the government, illustrates once again the disdain of Mr Viktor Orban’s regime for the value of science, academic freedom and, at the same time, blundering disregard for the rule of law," a spokesperson said.
"Disbanding the research network of the Academy of Sciences is another sad day for Hungary. It marks the abusive end of the most prestigious research organisation of Hungary, with a history of excellence and service to the Hungarian nation extending over 150 years."
Thousands of Hungarians have protested the planned overhaul of research bodies and budgets, which they see as the government's latest attempt to expand its role in public life.
Laszlo Palkovics, the country's innovation and technology minister who authored the bill, said the change was needed "to ensure a sustainable boost to Hungary's long-term competitiveness ... [and] a more efficient use of resources."
The European Commission said it will monitor Hungary's public research system and urged authorities "to refrain from any decision restricting scientific and academic freedom".
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