Plans to encourage new state-funded faith schools in England to take up to 25% of pupils from other backgrounds are to be drawn up by the government.
The Church of England has backed the government's proposal
Education Minister Lord Adonis told peers an amendment would be made to the Education and Inspections Bill.
But he said it would not be mandatory, adding: "There will be no quotas."
Peers had debated an amendment from Lord Baker to make taking 25% of pupils from other faiths, or of no faith, statutory. He later withdrew it.
The Conservative former education secretary told the House of Lords he saw some faith schools as "divisive", saying: "I just think it's wrong to divide children by religion at the ages of five and 11."
"And where that has happened, in societies like Northern Ireland, that crop has produced a savage harvest."
Lord Baker withdrew his amendment at the end of the debate, after Lord Adonis's announcement.
Lord Adonis said an amendment would be brought forward to give local authorities the power to require new faith schools to offer 25% of places to children of other faiths or no faith.
Where there was a lot of local opposition, parents and others will be able to appeal to the education secretary, he said.
Lord Adonis said: "We do not believe it right for there to be a mandatory, national 25% requirement in respect of new faith schools.
"However, we would wish to give local authorities, in their role as guardians of community cohesion, a power to require that new faith schools have admissions policies which include an offer of at least 25% of places on the basis of local preference, not faith preference alone."
The government has said the plans could help cut religious and racial tensions.
It appears to have been Lord Baker's intention to table a similar amendment that prompted the government's rethink.
Lord Alton, an independent peer and Catholic member of the House of Lords, argued against statutory quotas, saying they risked undermining some of England's most successful schools.
He pointed out that for many successful Catholic schools, parents had to join waiting lists for places.
"Even where they had helped raise funds to help build a new school and had been keen members of the Catholic parish, they would be denied a place at the local school," he said.
"Think about the resentment this could easily engender. Far from encouraging community cohesion and integration, we will have sown the seeds of division."
The Church of England has already said it will set aside a quarter of places at its new schools for people outside the faith.
But Catholic, Muslim and Jewish groups oppose plans to impose a quota.
On Tuesday, Prime Minister Tony Blair told his monthly press conference faith schools were a "difficult" issue.
The plans are expected to be debated in the House of Lords at the end of this month.