The maximum stake on fixed-odds betting terminals (FOBTs) will be reduced to £2 under new rules unveiled by the government.
Currently, people can bet up to £100 every 20 seconds on electronic casino games such as roulette.
Sports Minister Tracey Crouch said reducing the stake to £2 “will reduce harm for the most vulnerable”.
But bookmakers have warned it could lead to thousands of outlets closing.
William Hill, which generates just over half its retail revenues from FOBTs, described the government’s decision as “unprecedented” and warned that 900 of its shops could become loss-making, potentially leading to job losses.
It said its full-year operating profit could fall by between £70m and £100m.
GVC Holdings, which owns Ladbrokes, said it expected profit to be cut by about £160m in the first full year that the £2 limit is in force.
Shares in William Hill and GVC Holding both fell following the news.
Ms Crouch said: “We recognise the potential impact of this change for betting shops which depend on (FOBT) revenues, but also that this is an industry that is innovative and able to adapt to changes.”
Tom Watson, the shadow secretary of state for Digital, Culture, Media and Sport, told the BBC: “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.
“The bookmakers have chosen to take a defiant approach, trying to face down parliament, really, with a very aggressive campaign.”
The Church of England praised ministers for “admirable moral leadership” for reducing the maximum stake.
The government said the stake limit would come into effect some time next year, but would not set an exact timetable.
Analysis: Amol Rajan, BBC media editor
In taking the most drastic of the options available to them on FOBTs, the government has indicated that gambling is on a journey much like nicotine a generation ago.
Many addictive behaviours chart the same course. First, they are commonly accepted, then victims speak out and a campaign is launched. Finally, new laws catch up with a shift in public sentiment.
Industry figures argue that what is at stake is not only jobs and revenues for the Exchequer, but the principle that in a free society fully informed adults should be free to spend their money as they choose, so long as it doesn’t harm others.
Campaigners have successfully argued that the harm to communities and individuals is severe enough to warrant a major change.
It’s vital to remember that, while FOBTs understandably grab the headlines, this review also looks at the radical shift of the industry online.
There many addicts who find there is no respite, and children with smartphones are potentially exposed.
Tighter regulation of online gambling is the next battle campaigners intend to win.
The government’s consultation into gambling machines found consistently high rates of problem gamblers among players of FOBTs “and a high proportion of those seeking treatment for gambling addiction identify these machines as their main form of gambling”.
Anti-gambling campaigners have condemned the machines, saying they let players lose money too quickly, leading to addiction and social, mental and financial problems.
Ms Crouch said the £2 limit on FOBTs would “substantially” reduce harm and protect the most vulnerable players.
Matt Zarb-Cousin is now a spokesman for the Campaign for Fairer Gambling but was previously addicted to FOBTs.
“It’s no exaggeration to call FOBTs the crack cocaine of gambling,” he has told the BBC.
“If we had a gambling product classification, similar to that of drugs, FOBTs would be class A.”
William Hill chief executive Philip Bowcock, said: “The government has handed us a tough challenge today and it will take some time for the full impact to be understood.”
Peter Jackson, chief executive at Paddy Power Betfair welcomed the government intervention, saying his company had been concerned that FOBTs were damaging the reputation of the gambling industry.
The British Horseracing Authority (BHA), which receives millions of pounds from bookmakers through a levy, said it would work closely with the government to respond the decision.