A flagship policy that would have given workers the right to claim unfair dismissal after their first day on the job is to be ditched by the government in favour of a six month-threshold.

In a U-turn constituting a direct breach of Labour’s manifesto, the government said it had brokered a deal between six of the country’s biggest business groups and trade union leaders to shake up its plan for the biggest upgrade in employment rights for a generation.

The move comes after the business secretary, Peter Kyle, told businesses at the CBI conference this week that he would listen to concerns about the effects of the law change on hiring. A trade union source told the Guardian: “They’ve capitulated and there may be more to come.”

The Trades Union Congress said it was prepared to accept the compromise arrangement, after days of negotiation. “The absolute priority now is to get these rights – like day-one sick pay – on the statute book so that working people can start benefiting from them from next April,” said its general secretary, Paul Nowak.

A TUC source said there was a view that the six-month threshold was more workable than the more loosely defined nine-month probation period, which will be scrapped.

But MPs are likely to be unnerved by the breach of Labour’s manifesto, which promised “day one” protection against unfair dismissal, while trade unions descended into infighting over the 11th-hour change.

The reversal adds pressure to ministers already battling accusations that Rachel Reeves’s budget broke Labour’s pre-election promises not to raise taxes on working people.

Kyle has replaced Jonathan Reynolds as business secretary, the latter having steered through the legislation with the former deputy prime minister, Angela Rayner.

A source close to Rayner said she would respond once she had talked to other MPs. Just weeks ago, the former deputy prime minister gave a speech in the chamber that vigorously defended day-one protections.

Kyle committed on Monday to ensuring businesses would not “lose” as a result of the changes, which included a ban on zero-hours contracts and day-one protections for workers against unfair dismissal.

“I will not allow it to become zero-sum, [you] give one to the other, the other loses … This has to be got right,” he said.

Leaders from six major business lobby groups welcomed the breakthrough with relief, following days of behind-closed-doors meetings with the TUC, six unions and ministers at the Department for Business and Trade.

In a joint statement, the lobby groups said the move was “crucial for business confidence to hire and to support employment, at the same time as protecting workers”.

A union source said the changes had been agreed to allow the bill to progress faster through the House of Lords, which has significantly delayed the legislation. It will mean the qualifying period for unfair dismissal will be reduced from two years to six months.

One senior union figure said: “If ping pong had gone beyond Christmas, sick pay from day one would have been lost from April, and other new rights could have been delayed beyond April 2027.”

Another called the agreement a “good outcome” that would enshrine workplace protections in law from six months of employment. “The Tories cannot come back in and just extend the period to two years.

“Bluntly, the biggest thing is there is no threat to delay the legislation – it will be in by Christmas and employers have to get behind that.”

The deal marks a dramatic shift from union leaders, and exposes a schism between some of Labour’s largest financial backers. As recently as last month the TUC had been warning that a six-month period would leave more than 2 million workers at risk of unfair sacking.

The Unite general secretary, Sharon Graham, said the bill was now a “shell of its former self” as she made clear her objection to the deal reached with other trade unions. “These constant row-backs will only damage workers’ confidence that the protections promised will be worth the wait. Labour needs to keep its promises,” she said.

The bill originally promised that the qualifying period for unfair dismissal would be removed altogether and the government had proposed a lighter-touch probation period that businesses could use instead, limited in law to nine months. That probation period will now be removed and the law will make it impossible for an employee to claim unfair dismissal if they have been in post for less than six months.

Unions insisted they had won concessions, including on costs, but the move is likely to anger leftwing Labour MPs who regarded the employment rights bill as a key offering.

The bill has been amended three times by Tory and Liberal Democrat peers in the Lords to accommodate key business demands. Kyle had said he would do “what it takes” to unblock parliamentary hold-ups to the bill because of Lords amendments, before then consulting on its implementation.

“The voice of business, the voice of people who work in business, will be heard when we get down into the weeds of implementing those key parts of the employment rights bill. And yes, I’m talking about zero-hours contracts and day-one rights,” he said.

The Conservative leader, Kemi Badenoch, said it was “another humiliating U-turn”.

“Labour talk about stability, but govern in chaos. No company can plan, invest or hire with this level of uncertainty hanging over them.”

She said the bill still contained measures that would “damage businesses and be terrible for economic growth, and the Conservatives will fight every single one. If Labour won’t scrap the worst elements of this awful bill, we will. Britain cannot build prosperity with more and more bureaucracy.”

The Department of Business and Trade said the outcome was the result of a compromise process. “The government was pleased to facilitate these discussions and to set an example of the benefits of working together, and remains committed to continue engaging with trade unions, business and employers to make working lives better, support businesses and, vitally, deliver economic growth and good job creation,” it said in a statement.

Bosses had been warning that the bill would add to pressures on employers given a slowdown in the jobs market, with the potential to hit the recruitment of young and vulnerable people in particular.

The six business lobby groups said: “Businesses will be relieved that the government has agreed to a key amendment to the employment rights bill which can pave the way to its initial acceptance.”

However, they said there were several key points where bosses still held reservations, including on rights for zero-hours contract workers to guaranteed hours and more powers for trade union organisation.