The site has said that it would be shutting down its current 'erotic services' section and letting all of the postings expire.
In its place, the company plans to offer a new section called 'adult services.' Postings in the new section will be individually screened by company moderators and obscene or illegal content would be removed.
The decision comes after Craigslist was taken to task in many parts of the country after a man in New York allegedly used the service to hire a masseuse who was later killed.
US government officials expressed outrage at the section, which was described as an "internet brothel" and a haven for illegal activity. The company's reaction has brought mixed reviews.
"I'm encouraged that craigslist has agreed to fundamentally change how they operate and monitor their site," said Illinois attorney general Lisa Madigan.
"The steps they're taking are the only effective way to prevent the exploitation of women and children."
New York attorney general Andrew Cuomo, however, was not sold on the plan. He dismissed the move as an attempt to avoid legal action rather than a genuine effort to clean up its practices.
"Several weeks ago, we informed Craigslist of an impending criminal case that implicated its website," Cuomo said in a statement.
"Rather than work with this office to prevent further abuses, in the middle of the night, Craigslist took unilateral action which we suspect will prove to be half-baked."