Companies which encourage people to make frivolous compensation claims are being warned they have one last chance to avoid new regulations.
Lord Falconer says genuine claims are fair
The lord chancellor says "no win no fee" claims firms must end misleading advertisements and sales practices which falsely raise compensation hopes.
"People should not be encouraged to always 'have a go' however meritless the claim," Lord Falconer said.
The warning is part of plans to tackle Britain's "compensation culture".
Unveiling the plans, Lord Falconer said: "If you have a genuine claim - where someone else is to blame - you should be able to get compensation from those at fault.
"This is only fair. The victim or the tax payer shouldn't have to pay out where someone else is to blame.
"But there is not always someone else to blame. Genuine accidents do happen.
"The perception that there is easy money just waiting to be had - the so-called 'compensation culture' - creates very real problems."
This fear of claims was preventing many organisations and public bodies from carrying out sensible activities for fear of being sued, he said.
This was not the fault of lawyers, but of some claims firms which lead people to believe they can claim compensation simply because they suffer an injury, he added.
Lord Falconer pledged to "work together" with all parts of the industry including claims management firms, the legal profession, insurers and local authorities to deal wit the problem.
"It is in all our interests to create a society where people are confident about taking risks and not running scared of the next law suit," he said.
Government plans to tackle 'compensation culture'
Ensure proper regulation of claims firms
Firms get last chance to regulate themselves through the new Claims Standards Council
If they fail a new regulatory framework would be set up
Advertisements urging patients to claim against doctors to be discouraged
Greater use of alternative dispute resolution
Ensure compensation awards and costs are proportionate
Reducing accidents by better health and safety measures
Promoting affordable insurance
Set up ministerial steering group to co-ordinate action
Shadow Home Secretary David Davis said: "The growth of the compensation culture has had a number of damaging consequences, not least the sharp decline in voluntary work, like outdoor activities.
"We welcome any genuine attempts to reverse this but there is still much more to be done."
He urged the government to look at ways to "nurture a culture of responsibility and common sense" rather than pretending the "compensation culture will go away by itself".
The Conservatives argue that an emphasis on people's rights has fuelled a rise of the "compensation culture".
They say the human rights industry and the effect of the Human Rights Act costs the UK £10bn a year in claims.
But Lord Falconer dismissed this view saying: "The number of actual accident claims had gone down over the last few years.
"But the numbers of bodies like schools or local authorities or hospitals that are practising defensive activity in order to avoid the possibility of claims has probably gone up."
He said the fact that some local authorities refused to open a beach in case someone got injured in the sea had nothing to do with the protection from torture afforded by the Human Rights Act.
Recent stories illustrating the climate of fear of compensation include those of a school which made its pupils wear goggles to play conkers, and a Girl Guide whose parents won £3,500 after she singed her fingers while cooking sausages.
The plans come in the government's response to the Better Regulation Task Force Report 'Better Routes to Redress'.
The number of accident claims fell by 9.5% last year, failing to support claims Britain is developing a litigation-happy culture like the US.