The announcement came during the Queen's Speech on Tuesday when the British monarch outlined the government's forthcoming legislative programme.
"My government will continue to provide protection from discrimination and exploitation," Queen Elizabeth told parliament in London.
"Legislation will be introduced to combat discrimination in the provision of goods and services on the grounds of religion, as well as race, sex and disability. A single commission for equality and human rights will be established."
The proposed new law is intended to end an anomaly whereby British law offers protection to Jews and Sikhs under race legislation but not to Christians, Muslims, Buddhists or followers of other religions.
However, it will have to be approved by parliamentary vote before it is put on the statute books.
The government has already acknowledged that Muslims suffer from "a consistently higher level of unfair treatment than ... most other religious groups".
Massoud Shadjareh of the London-based Islamic Human Rights Commission welcomed the move.
"Outlawing discrimination on the basis of faith is something long overdue. Legislation on racial discrimination has itself been discriminatory against Muslims by protecting Jews and Sikhs but denying the same protection to Muslims," said Shadjareh.
"Addressing this injustice is something that should be welcomed by everybody, it is essential for a multi-faith and multi-cultural society."
At present, British law protects people on the basis of their colour, race or ethnic origin but not their religion.
"Discrimination, in whatever form, is wholly unacceptable and the government is determined to tackle it," the Home Office said of the plans, outlined in parliament.
The proposals will be welcomed by Britain's religious communities - particularly its 1.8 million Muslims who say they have been subjected to a surge in abuse since the attacks of September 11 2001, and the wars in Afghanistan and Iraq.
Muslims have long argued that discrimination - which can take the form of insults or intimidation or being refused a job or a place at school - is rife.
"Discrimination, in whatever form, is wholly unacceptable and the government is determined to tackle it"
British Home Office statement
Earlier this year, a major report on British Muslims found that persistent and untackled Islamophobia could lead to "time-bombs" in the form of backlashes and bitterness.
The Commission on British Muslims and Islamophobia said the aftermath of the 9/11 attacks has made life more difficult for Muslims in the UK.
It criticised public bodies for failing to address "institutional Islamophobia" and warned that exclusion from public life perpetuated a feeling among some Muslims, particularly the young, that they do not belong in the country
However, critics have warned that the proposed new laws could open a Pandora's box, pitting the rights of one minority against those of another.
Non-religious campaigners said the proposals could create more problems than they solve.
Atheists said they fear they will be turned into second-class citizens while gay rights activists said they have been persecuted by Christians for years and have never been offered protection in law.
The government has tried before to introduce laws banning religious discrimination - in 2001, when it drafted sweeping new anti-terrorism legislation in the wake of the US attacks.
Muslims oppose Tony Blair's
support for the 'war on terror'
But the House of Lords, Britain's upper parliamentary chamber, blocked the proposals, objecting to their status as an add-on to the anti-terror bill.
Politicians have warned that the latest proposals face a similarly tough ride through parliament due to civil liberties concerns and overlaps with other laws.
Tensions between Britain's Muslim and non-Muslim communities have been exacerbated by the "war on terror", in which Britain has played a lead role alongside the United States.
The government says the new laws would apply equally to "radical" Muslim preachers, who urge their followers to pursue violence, as well as those who abuse Muslims.