The move follows a lengthy consultation about the machines - branded the "crack cocaine of gambling" by critics - and will come as a major blow to bookmakers, who argued that a dramatic cut would lead to job losses.
The Government said that the change was designed to reduce the potential for large losses and cut the risk of harm to both players and the wider community.
Culture Secretary Matt Hancock said: "When faced with the choice of halfway measures or doing everything we can to protect vulnerable people, we have chosen to take a stand.
"These machines are a social blight and prey on some of the most vulnerable in society, and we are determined to put a stop to it and build a fairer society for all."
The announcement was made by sports minister Tracy Crouch, who said: "Problem gambling can devastate individuals' lives, families and communities.
"It is right that we take decisive action now to ensure a responsible gambling industry that protects the most vulnerable in our society. By reducing FOBT stakes to Â£2 we can help stop extreme losses by those who can least afford it.
"While we want a healthy gambling industry that contributes to the economy, we also need one that does all it can to protect players.
"We are increasing protections around online gambling, doing more on research, education and treatment of problem gambling and ensuring tighter rules around gambling advertising.
"We will work with the industry on the impact of these changes and are confident that this innovative sector will step up and help achieve this balance."
Other measures announced by the Government include:
- The Gambling Commission to toughen up protections around online gambling including stronger age verification rules and proposals for customer spending limits;
- A multimillion-pound advertising campaign promoting responsible gambling;
- Responsible gambling messages to appear for the duration of all TV adverts;
- A Public Health England review of the public health harms of gambling;
- A review of age limits for National Lottery games at the time of the next licence competition.