The Organisation of Petroleum Exporting Countries, which produces just over a third of the world's oil, said it would cut current production by 1.2 million barrels per day to 26.3 million bpd from November 1, following an extraordinary meeting in the Qatari capital Doha.
An official statement said that the measure was taken after noting that oil supplies were well in excess of demand.
OPEC members had suggested ahead of the meeting that the cartel would carry out a cut of one million bpd in a bid to shore up flagging crude prices.
The cartel decided to cut current output, which is below its official quota of 28 million bpd. The official quota remains at 28 million bpd, where it has stood since July, 2005.
Analysts said a cut to actual production would likely send oil prices higher, while a cut to the official quota would have seen them fall because OPEC lacks credibility by already producing below official targets.
The cartel had last week agreed in principle to a one million bpd cut as oil prices have fallen to below US$58 per barrel in recent days.
That marked a drop of more than 25 percent from record highs above US$78 struck in July and August, although prices have tripled since 2002.
Each of OPEC's 11 members, except Iraq, is to cut its output, while keeping official quotas unchanged.
Oil kingpin Saudi Arabia agreed to slash 380,000 barrels from its daily production of 9.1 million bpd. Iran is to cut the second largest amount -- shedding 176,000 bpd -- while Venezuela will produce 138,000 fewer barrels per day.
"Heads of delegation noted with concern ... that crude oil supplies are well in excess of actual demand, as the above-average level of crude stocks in OECD countries demonstrates, and that the oversupply situation and imbalance in supply-demand fundamentals have destabilized the market," the OPEC statement said.
The OECD zone includes most of the world's biggest economies, including western Europe countries, the United States, Japan and Canada.
"We are cutting from actual production of 27.5 million," UAE Energy Minister Mohammad bin Dhaen al-Hamli told a news conference after OPEC had made its latest output decision.
Mr Hamli was speaking in place of OPEC President and Nigerian Oil Minister Edmund Daukoru, who turned up in Doha only after the meeting had finished.
The UAE minister did not rule out the possibility of a fresh production cut at the OPEC's next meeting in Abuja, Nigeria, on December 14.
"The (OPEC) secretariat is going to monitor the market until the Abuja (meeting) and then take an appropriate decision," on a possible cut, Mr Hamli said.
Several OPEC ministers said ahead of the meeting that they were ready to support another cut if necessary.
The UAE minister meanwhile said the cartel was looking for a "fair and equitable price" for crude oil.
World oil prices closed higher on Thursday, with New York's main contract -- light sweet crude for delivery in November -- gaining 85 cents to US$58.50 per barrel.
In London, benchmark Brent North Sea crude for December delivery jumped US$1.29 to end at US$60.87.
Oil prices rocketed earlier this year in the face of geopolitical concerns in the Middle East caused by the conflict between Israel and Hezbollah and the standoff between Iran and the West. They have since tumbled on growing US energy inventories.
During the past few years, however, crude futures have been steadily boosted by strong global demand, especially from emerging powers China and India.