The Master of the Rolls, Sir Thomas Bingham, sitting with Lords Justices Neill and Hirst, made the dramatic change at the end of a judgment which reduced a pounds 350,000 award to the rock star Elton John to pounds 75,000. The case may go to the House of Lords.
Yesterday's ruling will affect all future libel judgments, including cases in progress; counsel on both sides of a case and the trial judge can put figures to the jury "to reflect the upper and lower bounds of a realistic bracket".
Civil cases other than libel are decided by a judge without a jury, and according to tariffs. Until now, judges have only been able to remind jurors to consider in general terms the monetary value of their awards in terms of a dinner out, a car, a holiday or a three-bedroomed house. Five years ago, the law was changed to allow the Court of Appeal to cut high awards.
Yesterday's ruling was predictably welcomed by newspapers and their lawyers, but criticised by others for removing a check on reckless publication by tabloid newspapers.
Elton John, who once won pounds 1m from the Sun in an out-of-court settlement, after it ran an article in which a rent boy made false allegations about his private life, said the judgment was unfair. "I believe that the 12 ordinary people on that jury understand today's economics better than the Court of Appeal," he said.
In their 59-page ruling, the judges said: "It is, in our view, offensive to public opinion, and rightly so, that a defamation plaintiff should recover damages for injury to reputation greater, perhaps by a significant factor, than if that same plaintiff had been rendered a helpless cripple or an insensate vegetable."
Despite earlier cases in which the Court of Appeal had cut excessive awards, juries had continued to hand down damages which "bear no relation to the ordinary values of life".
The three judges added that there had been "a series of jury awards in sums wildly disproportionate to any damage conceivably suffered by the plaintiff has given rise to serious and justified criticism of the procedures leading to such awards".
They added that this could not be considered the fault of juries. Without the clear guidelines which will now be issued, "They were in the position of sheep loosed on an unfenced common, with no shepherd."
Juries should not be reminded of previous libel awards as a benchmark, because all cases were different.
They said: "It serves no public purpose to encourage plaintiffs to regard a successful libel action, risky though the process undoubtedly is, as a road to untaxed riches. Nor is it healthy if any legal process fails to command the respect of lawyer and layman alike, as is regrettably true of the assessment of damages by libel juries."
The judges said that mentioning figures, far from developing into an "auction", would "induce a mood of realism on both sides". It would "buttress the constitutional role of the libel jury by rendering their proceedings more rational and so more acceptable to public opinion".
The award to Elton John, in November 1993, included pounds 275,000 "exemplary" damages to punish the Sunday Mirror for publishing a totally untrue story that the singer-songwriter was hooked on a bizarre "diet of death" which was a form of the slimmers' disease bulimia.
Jurors accepted his claim that the story was printed recklessly, without regard to the truth, and with the objective of boosting sales of the newspaper for profit.
But payment of the rarely-awarded punitive damages was suspended pending an appeal by Mirror Group Newspapers. The judges held that the total award was "manifestly excessive" and they reduced the exemplary damages to pounds 50,000. They also reduced the pounds 75,000 compensatory award to pounds 25,000. Although the article was false, offensive and distressing, it did not attack the star's personal integrity or damage his reputation as an artist, they ruled.