The city will help a real estate developer buy 51 storefront windows where prostitutes ply their trade to convert them into apartments or commercial premises.
Although prostitution has been legal in the Netherlands since 2000, the city is trying to bring about a voluntary clean-up of Amsterdam's famous red light district.
City mayor Job Cohen told a news conference that the deal announced represented "a big step".
"Since the legalisation in 2000, things have changed," Cohen said.
"The law was created for voluntary prostitution but these days we see trafficking of women, exploitation and all kinds of criminal activity," he said.
The Wallen, as the prostitution district is known in Dutch, is one of the oldest and most picturesque areas of Amsterdam and draws hoards of tourists, although they mainly flock there to gawk at the women.
"It is not about chasing prostitution of the Wallen, but it's about fighting crime," Cohen stressed.
City council member responsible for finance Lodewijk Asscher said closing down the prostitute windows should not have a negative impact on tourism.
"We are talking about what we call vertical drinkers, people who walk around the district drink in hand and never even sit down in the area's bars and restaurants," he said of the tourists attracted to the area.
"What's more important? A tourist attraction or women who are victims. It's modern slavery," Asscher added.
Sex worker anger
However, the Dutch sex workers' union De Rode Draad criticised the plans.
"We believe that less windows means more exploitation of women," said spokeswoman Metje Blaak.
"If the windows close down, women who are being exploited will be hidden somewhere else where union representatives and health workers can't make contact with them," she explained.
"The city should go after pimps, not real estate."
Real estate developer NV Stadsgoed agreed to pay 25 million euros to buy the storefront windows from red light district kingpin Charles Geerts.
Prostitutes hire the windows for around 100 euros for part of the day and one window usually has several prostitutes per day, making it a very lucrative business to hire the windows out.
The city of Amsterdam has earmarked up to 15 million euros to compensate the loss of value when the prostitutes are no longer there.
Under the deal with the municipality, Geerts is not allowed to invest the money he earns in the red light district again. Even if he invests outside the Wallen, he is not allowed to invest in prostitution, gambling or coffee shops — cannabis cafes allowed to sell marijuana.
The 51 prostitutes' windows to be closed represent around one third of such windows in the red light district.
The city of Amsterdam last autumn announced the plans to clean up the area, which has been the city's prostitution zone for more than one hundred years.