The Dutch government is banning the sale of all magic mushrooms after a series of high-profile incidents involving tourists who had taken them.
The decision will take effect within several months, said a spokesman for the Dutch justice ministry.
A major Dutch producer of the psychedelic mushrooms said he stood to lose millions of euros as a result.
The Netherlands is famed for its liberal drugs policy, with marijuana openly sold in licensed cafes.
Magic mushrooms, more properly known as psilocybe, contain the psychedelic chemicals psilocybin and psilocin.
"We intend to forbid the sale of magic mushrooms," said justice ministry spokesman Wim van der Weegen.
"That means shops caught doing so will be closed."
Currently in the Netherlands the sale of dried magic mushrooms - in which the psychoactive chemicals psilocybin and psilocin are stronger - is banned but fresh mushrooms are allowed.
This is because it is more difficult to ascertain how much of the chemicals fresh mushrooms contain. But Mr Van der Weegen said this was exactly the issue.
The problem with mushrooms is that their effect is unpredictable. It's impossible to estimate what amount will have what effect."
Calls for a re-evaluation of the drug grew after a 17-year-old French girl jumped from a building after eating magic mushrooms during a school trip to Amsterdam in March.
Other incidents involving the drug have included an Icelandic tourist jumping from a balcony and breaking both legs and a Danish tourist driving his car wildly through a camping ground, narrowly missing sleeping campers.
"It's a shame, the media really blew this up into a big issue," said Chloe Collette, owner of the FullMoon shop, which sells magic mushrooms in Amsterdam.
She said all the incidents had involved magic mushrooms in conjunction with other drugs.
Murat Kucuksen, whose farm supplies about half the magic mushrooms on sale in the Netherlands, said he stood to lose several million euros as a result of the ban.
Users of fresh mushrooms experience effects ranging from giggling fits and intensification of colours, lights and sounds to, more rarely, hallucinations. Negative effects can include vomiting, and anxiety.