"The current situation is unsustainable, so we must drastically reduce the number of asylum seekers coming to Sweden," Social Democrat Prime Minister Stefan Löfven told reporters.
The government will adapt Sweden's Aliens act with a temporary law which will apply for three years.
Vice Prime Minister Åsa Romson of the Green Party could not hold back the tears during the press conference.
"It's a sad decision and we must make sure that we try to strengthen our capacity to receive refugees as soon as possible," Green Party member of parliament Magda Rasmusson told Radio Sweden.
The government also wants to introduce medical tests to determine the age of unaccompanied refugees claiming to be minors, a measure that has stirred controversy in Sweden as these tests are not considered reliable by some experts.
Sweden has received some 80,000 asylum seekers in the last two months and the Migration Agency said earlier in November it could no longer guarantee accommodation for all.
The government said these measures are also meant to put more pressure on other EU countries to take in refugees.
"Now, to put it bluntly, more people will have to seek asylum and get protection in other European countries," Löfven said.