The European Parliament has voted to ban imports of illegal timber.
From 2012, companies importing timber will need to prove where it came from, and will face legal sanctions if they do not comply with the new law.
The vote follows several years of wrangling over how stringent the legislation should be.
Campaigners say they are pleased that the issue is to be addressed at last. About 20% of timber coming into the EU is thought to be illegal.
The illegal timber trade plays a significant part in the deforestation of some tropical countries.
It helped sustain the recent Liberian civil conflict as armed factions used the revenue for arms.
"At last the link between the European market and the forests around the world ravaged by illegal logging has been weakened," said Finland's Green MEP Satu Hassi, who has led moves within the parliament.
"For too long the EU has preached against such logging and the resulting massive deforestation while simultaneously providing one of the largest markets for illegal timber.
"As such, this agreement on the illegally sourced timber represents a major international breakthrough."
The new law will force companies operating in the EU to produce "chain of supply" documentation so that, in principle, each piece of timber can be traced right back to its source.
Companies that operate "responsible timber" policies have welcomed the move.
"It is good news that Europe has finally agreed to crack down on illegal timber, creating a level playing field for responsible retailers," said Ian Cheshire, CEO of Kingfisher plc, the parent company of European DIY giants such as B & Q, Castorama and Screwfix.
"This new regulation will mean that consumers can have even greater confidence that the wood products they buy are not contributing to deforestation and climate change."
Campaign groups working on environmental and human rights issues were also generally pleased by the move.
"This law hangs up a 'closed for business' sign to a destructive market," said Greenpeace EU forest policy director Sebastien Risso.
"It promises to level the playing field so legitimate companies and customers are better able to act sustainably."
However, they were disappointed that EU member states fought for and obtained exemptions for five years on printed materials.
To a large extent, the new law replicates measures contained in the amendment to the Lacey Act passed in the US in 2008.