Economics Minister Joseph Deiss has insisted armoured vehicles will only be delivered to Iraq once guarantees exist that they will be used for civilian purposes.
Deiss gave reassurances to a parliamentary committee on Tuesday following Swiss media reports that the Americans wanted the tanks to be given to the Iraqi army.
The majority of the parliamentary committee accepted Deiss's point of view and voted not to stop the sale by 13 votes to 10, with two abstentions.
"One can't be neutral against terror," said Edi Engelberger, the committee's president.
Although the Swiss government has approved the sale of 180 M113 armoured personnel carriers, none has yet been delivered. The tanks are to be sold to the United Arab Emirates (UAE), which intends to pass them on to Iraq.
Final authorisation is still lacking after the July attacks on London triggered new fears and fanned the debate regarding Swiss neutrality.
The Basler Zeitung newspaper reported at the weekend that the tanks would not be used in the police force, as originally intended, but would instead be used in the Iraqi army tank division, at the alleged request of the United States.
The government approved the export on June 29 but has yet to issue a legally binding export certificate, the economics ministry said last month.
It said that after it became known that the UAE would hand the 180 armoured personnel carriers over to the Iraqi government as a gift, a so-called end-user declaration was required, formally acknowledging that this was the case.
The Baghdad government must now confirm that the tanks are indeed bound for Iraq.
The government-owned Ruag armaments group, which is selling the tanks, is required to submit an end-user declaration to the State Secretariat for Economic Affairs (Seco).
Seco said the US, as the personnel carriers' country of manufacture, must confirm that it approves the deal.
News of the planned sale provoked a mixed political reaction at the end of June.
The rightwing Swiss People's Party and the centre-left Social Democrats said that the move was contrary to neutrality and against Swiss development policy.
But the centre-right Christian Democrats and Radicals accepted the government's argument that Switzerland had an interest in stabilising the situation in Iraq.
Criticism of the sale gained further momentum after the suicide bomb attacks in London on July 7, which killed at least 53 people and injured more than 700.
Opponents claimed that the delivery of tanks to Iraq could make Switzerland a target for Islamic terrorists.
However, Deiss has denied that the risk would be any higher. He said that the government would continue with the sale.
Albert Stahel, a leading security expert, told swissinfo in an earlier interview that the risk of an attack by Islamic extremists on Switzerland remains very small.
But he said that some members of terrorist groups were able to use the country's financial institutions to deposit money.
Stahel said the government could use the armoured vehicles for the protection of foreign embassies in Switzerland instead of selling them to other countries.
swissinfo with agencies
From now until 2010, the Swiss army has to dispose of a surplus worth SFr10 billion ($7.7 billion), including 1,200 M109 and M113 armoured vehicles. These include:
200 personnel carriers
45 combat jets
2,600 tons of barbed wire
230 tons of tents
At the end of June the Swiss government approved the sale of 180 M113 armoured personnel carriers to the United Arab Emirates.
News of the sale provoked a mixed political reaction. A newspaper has claimed the purpose of the tanks is unclear.
The Iraqi government must first provide a so-called end-user declaration confirming that the tanks are indeed bound for Iraq. Approval for the export is still pending.
On Tuesday a parliamentary committee decided not to stop the sale by 13 votes to 10, with two abstentions.