It said the move will cut the risk of potentially large financial losses from the controversial machines as well as harm to both players and wider communities.
The decision goes further than the recommendations of a review carried out by the gambling regulator earlier this year, which recommended the maximum stake for FOBTs should be set at or below £30.
Culture Secretary Matt Hancock said: “When faced with the choice of halfway measures or doing everything we can to protect vulnerable people, we have chosen to take a stand.
“These machines are a social blight and prey on some of the most vulnerable in society, and we are determined to put a stop to it and build a fairer society for all.”
The decision is set to please campaigners but will come as a blow to bookmakers, which have warned it would cost betting shop jobs across the country.
Labour’s deputy leader Tom Watson told BBC Radio 4’s Today programme he was “absolutely delighted” by the decision, which he said would “help alleviate some of the terrible misery caused by problem gambling in Britain”.
Mr Watson said he hoped job losses could be avoided.
“The great tragedy of this is that for five years now, pretty much everyone in Westminster, Whitehall and in the country has known that these machines have had a very detrimental effect in communities up and down the land and the bookmakers have chosen to take a defiant approach and try to face down Parliament with a very aggressive campaign,” he said.
“The bookmakers themselves many years ago should have been diversifying, should have been investing in horse-racing, should have realised the harm done by these machines. They’ve only got themselves to blame when the Government has listened to public opinion.
“They’ve really boxed themselves into a corner, but I would hope that now that we’ve got this decision, the bookmaking companies will be able to make sure there is investment in other forms of recreational gambling that don’t have such addictive qualities.”