Although the Hillsborough relatives would not benefit, the reform would clear the way for future similar actions. It would also mean that the relations of those killed in road accidents would be able to claim damages.
Many of the relatives of those killed or injured in the tragedy nine years ago had sued for the mental illnesses they developed as a result of the trauma. But nearly all failed to get compensation because they had only indirectly heard about the accident - on television, or from someone else.
The Law Commission said the current law was drawn "unnecessarily tightly" and produced "arbitrary results". It suggested dropping the requirement that witnesses to a disaster should be "close in time and space" to the accident, and that they see it at first hand.
The House of Lords had ruled that by the time many relatives arrived at the stadium in Sheffield, they were too late to qualify for damages.
But Professor Andrew Burrows, the report's author, said: "You end up with the law having to decide whether you had come along in a sufficiently near period of time."
To win damages witnesses would still have to prove a "close tie of love and affection" with the victims.
And they would still have to demonstrate they had developed genuine mental illness as a result.
"The law is not saying you can recover damages just because you are upset, because of grief or anxiety. There is a line - and we are saying there should continue to be a line - between a recognised psychiatric illness and mental distress."
The proposals, which would apply only in England and Wales, came as Jack Straw, the Home Secretary, reaffirmed his view that there should be no new inquiry into the disaster.
Relatives of the Hillsborough victims welcomed the proposals. Trevor Hicks, chairman of the Family Support Group, said: " It's a step forward, even if it would not apply to us. It's better to have a new law applying ... in future.
"Families should not have been in a position where they had to fight for everything through the courts, and then get nothing."
Ninety-six spectators were killed and more than 400 injured at the stadium when fans were allowed into stands which were already filled to capacity.
Both relatives of the victims and police officers at the scene sued South Yorkshire Police for damages, claiming it had been negligent in controlling fans entering the stadium.
However, although most of the police officers who claimed won large sums, most relatives failed, despite the House of Lords accepting that their suffering was " no less real and frequently no less painful and disabling" than physical injuries.
The Law Commission report homed in on this, saying: "The apparent injustice of this position has been acknowledged by judges, newspapers, MPs and legal commentators."
The Home Office said last night that it would be considering the commission's report.Reuse content