The UK government will suspend its extradition treaty with Hong Kong "immediately and indefinitely".
Announcing the move, Foreign Secretary Dominic Raab said the UK "wants a positive relationship" with China.
But he said the "imposition" of the new national security law in Hong Kong by Beijing was a "serious violation" of the country's international obligations.
Labour said it would support changes to the law, calling it a "step in the right direction".
The extradition treaty means that, if someone in Hong Kong is suspected of a crime in the UK, then the British authorities can ask Hong Kong to hand them over to face justice - and vice versa.
The UK fears the arrangement - which has been in place for more than 30 years - could see anyone it extradites to Hong Kong being sent on to China.
Mr Raab also confirmed the government would extend its arms embargo - which has been in place with China since 1989 - to Hong Kong, stopping the UK exporting equipment, such as firearms, smoke grenades and shackles, to the region.
But China has accused the UK government of "brutal meddling", insisting it is committed to upholding international law.
The country also promised a "resolute response" if the UK withdrew from extradition arrangements.
'The UK is watching'
Beijing introduced the security law at the end of June, creating new offences which could see Hong Kong residents sent to mainland China for trial.
Critics said it could see pro-democracy protesters in the region being served with life sentences.
They have also said the law breaches an agreement made with the UK before Hong Kong - a former British colony - was handed over to China in 1997.
Under the 50-year agreement, China enshrined civil liberties - including the right to protest, freedom of speech and the independence of the judiciary - in Hong Kong's Basic Law, an approach which came to be known as "one country, two systems".
Mr Raab told MPs: "There remains considerable uncertainty about the way in which the new national security law will be enforced.
"I would just say this: the UK is watching and the whole world is watching."
The foreign secretary also confirmed plans for a path to UK citizenship for around three million Hong Kong people would be in place by early 2021, in response to the law.
However, Border Force officials have been given the ability to grant leave to any applicants before then.
Political and economic relations between the UK and China have become strained in recent months.
Mr Raab referenced a number of tensions during his speech, including the decision by the UK government to ban Chinese firm Huawei from the country's 5G network.