Home Secretary Theresa May said she was introducing interim guidelines for police stating they could only use stop and search powers if they reasonably suspect the person of terror-related activities.
She was responding to a European Court of Human Rights judgement earlier this year that Section 44 of the Terrorism Act 2000, which allows police to search people without suspicion, was illegal.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
"Officers will no longer be able to search individuals using section 44 powers. Instead, they will have to rely on section 43 powers, which require officers to reasonably suspect the person to be a terrorist," May told the House of Commons.
"And officers will only be able to use section 44 in relation to the searches of vehicles.
"I will only confirm these authorisations where they are considered to be necessary -- and officers will only be able to use them when they have 'reasonable suspicion'."
The new guidelines will be in place until a wide-ranging review of counter-terrorism legislation has been conducted by Prime Minister David Cameron's new coalition government, she said.
Shami Chakrabarti, director of civil liberties group Liberty, welcomed the move, saying Section 44 had "criminalised and alienated more people than it ever protected".
"It is a blanket and secretive power that has been used against school kids, journalists, peace protesters and a disproportionate number of young black men," she said.
"To our knowledge, it has never helped catch a single terrorist. This is a very important day for personal privacy, protest rights and race equality in Britain."
In a unanimous ruling in January, seven European Court judges said the searches breached the complainants' right to respect for their private life under Article 8 of the European Convention on Human Rights.
May said the government could not appeal the ruling but would not have done so even if it could.
