Redbridge Council, in north-east London, will no longer place looked after children with foster carers who smoke from January 2012.
Redbridge Council's Cabinet met on Tuesday evening and unanimously voted in favour of the new policy which would ensure that, other than 'exceptional circumstances', carers will not be able to foster children if they smoke.
The council said the decision was made to limit looked after children and young people's exposure to the damaging effects of passive and second-hand smoke and to give them the best possible start in life".
The new smoking policy will apply to foster carers, shared carers, respite carers, kinship carers and supported lodgings providers. It will not extend to private foster carers.
Cllr Michael Stark, Cabinet Member for Children's Services said: "While the Council recognises the proven skills and abilities of its carers who smoke, it is essential that the health of our looked after children is protected."
Under the new policy all new applicants who smoke will be advised at an early stage of the process that their smoking habits will be taken into consideration along with other health issues.
All existing carers will have a discussion about smoking at their annual review and during home visits. No children under five, those with a disability who are unable to play outside or those with respiratory problems will be placed in a smoking household.
Redbridge Council will offer support to its current foster carers who smoke to help them give up.
Hazel Halle, services director at the Fostering Network, said: "The dangers of passive smoking are well documented, and foster carers should not smoke in front of children - their health must always come first.
"It's great that Redbridge council is confident it can recruit enough non-smokers, although we wouldn't want to see potentially good foster carers put off from applying purely because they have the occasional cigarette."
The council said the new policy was the result of recent scientific evidence which showed that second-hand smoke is a cause of lung cancer and childhood respiratory disease, and that young children are particularly susceptible because their lungs and airways are small and their immune systems are immature.