The government wants to stop civilians and former soldiers from fighting or offering security in armed conflicts after South Africans were involved in several attempted coups and conflicts in African states.
But critics say the draft law will have far-reaching consequences for South African soldiers fighting for legitimate foreign forces as well as for ex-soldiers providing security services in conflict areas such as Iraq.
The International Peace Operations Association, a Washington DC-based group which represents private security companies, has called the proposed legislation "a threat to the peace and stability industry worldwide".
The bill, passed by the African National Congress-dominated parliamentary defence committee this week, outlaws mercenary activity and allows the government to declare certain conflicts prohibited to all South African citizens.
It is expected to pass easily through parliament, where the ANC holds a two-thirds majority.
Military analysts say the proposed law could put a quick end to most South African involvement in overseas conflicts.
Len le Roux, analyst at South Africa's Institute for Security Studies, said: "No military will employ someone who can't be deployed in an armed conflict.
"South Africans bring crucial skills and capabilities ... making them invaluable components in successful international peace and stability operations"
"In my mind it is a de facto way of saying no military must employ this person."
South Africans will need permission to serve in foreign armies or lose their South African citizenship, and may not be sent into combat, he said.
It will also become illegal for South Africans to work in countries including Iraq should the government declare the region a regulated area.
About 2,000 South Africans, many trained as soldiers in the apartheid-era military force, are believed to be working in Iraq.
The department of foreign affairs has estimated that at least 4,000 South Africans are employed in conflict areas around the world, but the actual number may be closer to 20,000.
Paul Boateng, Britain's high commissioner to South Africa, appealed to lawmakers to amend provisions that would affect about 800 South African ex-soldiers who have joined the British military.
The final version of the bill deletes a contentious phrase which would have allowed South Africans to fight in "liberation struggles", but some opposition parties say the bill remains discriminatory and may be unconstitutional.
Pieter Groenewald, Freedom Front MP, said: "Nobody can follow a career under circumstances such as these."
Rights group Amnesty International has argued an outright ban could be counterproductive.