Two or three prostitutes will be allowed to work together in "mini-brothels" for their own safety in an attempt to force the vice trade off the streets.
Tough action against kerb-crawlers will be combined with a drive to help prostitutes beat addiction to drugs and drink.
But ministers have ruled out the creation of licensed "red-light districts", arguing they would not tackle crime or increase the safety of call girls.
With an estimated 80,000 people selling sex in Britain, the Government set out its strategy for reducing the number of prostitutes. Most controversial was a plan to change the law to allow two or three prostitutes - possibly supported by a receptionist or "maid" - to work together in a flat without fear of prosecution for brothel-keeping.
Only prostitutes working on their own are allowed to sell sex without committing an offence.
Publishing the plans, which cover England and Wales, Fiona Mactaggart, the Home Office minister, denied the Government was "encouraging the commercial sale of women's bodies". But she added: "I think the evidence that women working on their own are putting themselves in danger is powerful."
She insisted that "very small-scale operations" such as "mini-brothels" could be run without offending neighbours. Ministers will press police and local authorities to "rigorously prosecute" kerb-crawlers, pointing out they can lose their driving licences. They could also be forced, at their own expense, to take courses designed to correct their behaviour. More than 300 kerb-crawlers have taken such a course in Hampshire and only four have reoffended.
Warning signs to motorists could be put up in red-light districts telling them that the area was being monitored by closed-circuit television cameras.
The Government will also create a new penalty so magistrates can divert prostitutes towards help for drug or alcohol abuse instead of forcing them back on to the streets to pay fines.
It will tighten guidance for social workers and teachers to help them spot signs of teenagers being tempted into prostitution.
Ministers have backed off from plans floated by David Blunkett, the former home secretary, to allow councils to designate "managed prostitution zones". The idea has been championed by Liverpool City Council, which wants to set up such a district away from residental areas.
But Ms Mactaggart said: "I can't accept we should turn a blind eye to a problem that causes misery for people living in, or near, red-light areas."
The Government plans were welcomed by police chiefs but Mark Oaten, the Liberal Democrats home affairs spokesman, said: "It will do very little to reduce the number of prostitutes on the street, improve the appalling conditions they work in or tackle health problems."
The Tories said more needed to be done to tackle the underlying social problems which caused prostitution.
Niki Adams, from the English Collective of Prostitutes, said: "I can't count how many crackdowns on clients they have promoted over the past 20 to 30 years. The effect has always been to make it more dangerous for women to work.
"It will give them less time to check out clients and women will be forced into working in more remote and dangerous areas because the clients won't want to be caught by the police."
'I get a few moments to judge people and decide if it's safe'
Jenny, 54, a single mother from the North of England, earns £30 to £35 per client but has to pay a medical expert £40 an hour to care for her disabled daughter while she is working. She has paid about 10 police fines for soliciting.
She believes the Government's recommendation to prevent kerb-crawling and street work will only heighten dangers for women. "As street workers, you get a little bit of time to judge the people stopping. I get a few moments to judge each person and decide if I feel safe. If I think they're OK, I get in the car, if not, I send them on."
Jenny welcomed the move to allow "mini-brothels" but said the rental costs of an office would force her to work even harder.
She added: "No woman I know has chosen prostitution as a career. It is because there is no alternative. They are girls running away from abuse at home who have no accommodation, or those in care suffering abuse, those who can't get any benefits because they're under-age or those who are alcoholics or drug addicts and turn to prostitution to feed their habits. It is because there's a lack of resources in other areas that many women get into this situation."