Mr Staw said he had strengthened guidelines.
On-the-spot fines for shoplifting will now be limited to first-time offenders who are not drug users, Justice Secretary Jack Straw has said.
Mr Straw said he had issued "strengthened revised guidance" to the courts on retail theft.
The changes will apply to shoplifters who have less than £100 in goods or caused less than £300 damages and are not drug users.
The Conservatives said it was a "welcome U-turn" from the government.
Mr Straw said the definition of retail theft had also been tightened so that on-the-spot fines can only be used in shoplifting cases where the goods stolen are fit to be re-sold.
The changes were made following "concerns raised over the inappropriate use of penalty notices for disorder," added Mr Straw.
'Glorified parking ticket'
According to the British Retail Consortium, firms lose £1bn a year to shoplifting.
Shadow Justice Secretary Dominic Grieve, for the Conservatives, said: "This is a welcome U-turn from the Justice Secretary.
"Today's (Thursday) crime statistics indicate shoplifting is up 10% - which shows just how reckless this government was to be letting thieves off with a glorified parking ticket."
Penalty Notices for Disorder can be issued to anyone over 16-years-old. Offences include intentionally harassing or scaring people, petty theft, being drunk and disorderly in public and destroying and damaging property.
Offenders can choose to have their case heard in court or pay the penalty within 21 days.
If no action is taken, a fine of one-and-a-half times the penalty amount is registered against the offender.