It "will be replaced with a system based on employment contracts," as part of a package of labour reforms, said a statement released at a press conference in Doha.
Sponsorship systems for foreign workers exist in most Gulf countries, which employ millions of foreigners, especially from Asia. The system has been strongly criticised by human rights groups and likened to modern-day slavery.
The reforms will also end the longstanding requirement that foreign workers obtain their employer's consent before leaving the country.
"The current exit permit system, which requires the employers' consent for an employee to leave the country, will now be replaced with an automated system through the ministry of interior," the statement said.
The new system will automatically grant an exit permit to an employee "after a 72-hour grace period prior to departure," the statement said.
The government will also raise the fine for employers who confiscate the passports of foreign workers to 50,000 rials ($13,580) from the current 10,000 rials, in a bid to stamp out the illegal but still common practice.
Foreign workers will also be able to change job at the end of their contract, without the need for the certificate they currently require that their previous employer has no objection.
If the contract is an open-ended one, a foreign worker will be able to change jobs after five years.
Qatar's treatment of its massive foreign workforce has been under the international spotlight as it launches a massive construction programme for the world football showcase in 2022.
Amnesty International charged that the tens of thousands of migrant workers building the multi-billion-dollar World Cup infrastructure were being treated like "animals", with hundreds dying on the construction sites, and launched a campaign for wholesale reforms.
Qatar has rejected claims that construction workers are being mistreated but has announced a series of measures to improve workplace safety and workers' conditions.
The 2022 World Cup has been plagued by controversy ever since it was awarded to the tiny Gulf state.
The president of world football governing body FIFA, Sepp Blatter, has called for the tournament to be played during the northern hemisphere's winter rather than in the searing heat of a Gulf summer.
But he has met fierce resistance from the big European leagues.
A decision will not be taken until 2015.
