Crime gangs rake in up to £4 million a year by flogging "recycled" stolen mobile phones overseas.
Officials revealed crooks have been giving blocked mobile phones a second lease of life by exporting them.
Police said the phones still work abroad and up to 100,000 handsets worth an average of £40 each are resold on the black market.
The Government, police and mobile phone industry joined forces today to sign an agreement designed to close the loophole.
The code of practice means recycling companies must check the details of every phone they are offered against a database of handsets reported stolen.
If the handset has been reported stolen and is on the National Mobile Phone Register the company will refuse to buy it and pass details to the police.
Up to 20 mobile phone recycling companies, representing 90% of the industry, have agreed to sign up.
Crime prevention minister James Brokenshire said: "By joining forces with the police, the mobile phone industry is closing a multimillion-pound loophole that has been exploited by criminals, and the industry should be congratulated.
"Alongside the impressive work on blocking stolen phones, this code will make mobile phone theft an even less profitable crime."
Jack Wraith, of the Mobile Industry Crime Action Forum, said: "The industry welcomes this very important initiative on the part of the recyclers."
Commander Simon Pountain, of the Association of Chief Police Officers (Acpo), said a further 100,000 offences may be detected every year.
He said: "Significant offences such as robberies and burglaries have been solved through utilising this new system which has also lead to arrests for murder."
The National Mobile Phone Register is linked to three databases, an industry database of blocked handsets, the police database of stolen mobiles and a voluntary public register.
Mobile phone recycling companies who have signed up so far include Mazuma Mobile, Mobile Phone Exchange, Royal Mail, West One Technology, Carphone Warehouse and Virgin Media.