The city also will ban 300,000 heavy polluting vehicles, such as industrial trucks, starting July 1.
In addition to regulating its 3.3 million vehicles, Beijing is temporarily halting construction and operations at industrial plants in an effort to reduce emissions.
Pollution has been a top concern for athletes participating in the Olympics, and some have altered their training or arrival time before their event to compensate for the air quality.
"The municipal government recognizes the inconvenience caused to the people resulting from the adoption of the traffic control measures," said transport department spokesman Zhou Zhengyu, quoted Reuters.
Drivers affected by the ban will be compensated by not having to pay road or vehicles taxes for three months, costing the city about 1.3 billion yuan (US$186 million), reported China's news agency Xinhua. Violators will lose the compensation.
The announcement about the vehicle plan, made Friday, occurred on a day when haze limited visibility in the city to a half-mile.
International Olympic Committee president Jacques Rogge said outdoor endurance events lasting more than an hour will be postponed if air quality is poor, according to the Associated Press.
Beijing is expecting the public transportation system to handle the increased usage and has built three new subway lines in anticipation of the games. About 4 million additional passengers are expected to use the system each day.
The city tested the traffic ban in August 2007, and while residents did not notice an immediate impact on air quality, authorities said they were satisfied with the results, according to Reuters.
Beijing has long said it would limit the number of vehicles on roads for the Olympics, but Friday's announcement gave the most details yet on the government's plan.
The Olympics are taking place from Aug. 8-24, and the Paralympics are occurring Sept. 6-17.