Health Secretary Alan Johnson said hospitals would only be paid for the treatment of a patient on a mixed-sex ward if it was clinically justified.
Trusts will also be able to apply for a slice of the £100m funding pot the DH is providing to help hospitals get rid of mixed sex hospital wards.
The 'privacy and dignity fund' is to be made available immediately through strategic health authorities to help trusts make the necessary adjustments to their accommodation over the next six months.
However, if patients are still being accommodated for no good reason on mixed-sex wards by the financial year 2010-2011, hospitals will be penalised, Mr Johnson warned.
'The message is clear - the NHS… must now eliminate it altogether other than were clinically necessary,' he said.
The government's chief nursing officer Dame Christine Beasley added that: 'Hospital staff must realise that being cared for in mixed sex accommodation can be very upsetting for patients…doctors and nurses have a clear duty to make sure that hospital patients are cared for in an environment which meets their clinical needs, and ensures that their privacy and dignity is maintained.'