The drug, which has a hallucinogenic effect, would be banned from December said the Dutch health ministry.
The death in March last year of a 17-year-old French girl who jumped from an Amsterdam bridge after taking hallucinogenic mushrooms had triggered a controversy in the country over the risks of such drugs.
No link was officially made between her death and the mushrooms but a majority in parliament called for a total ban on the drug.
Use of these mushrooms can "lead to unpredictable behaviour and risk-taking", the ministry said.
"The sale and possession of dried (hallucinogenic) mushrooms has been forbidden for a long time," the ministry said.
The ban would be extended to fresh magic mushrooms.
A report by Amsterdam health authorities in May said 92 per cent of incidents relating to magic mushrooms in the Dutch capital last year involved foreign tourists.
But another health report published in January 2007 said that while alcohol consumption led to 2050 incidents in 2005, magic mushrooms had caused only 70.
A total ban on all magic mushrooms should lead to the closure of so-called "smartshops" that sell them.
They have already announced that they will fight the decision in court.