David Cameron has ordered ministers to take action to clamp down on lawyers pursuing claims against veterans of the Iraq War.
Ministers on the National Security Council have been tasked with drawing up options to end "spurious" claims, including measures to curb the use of "no win, no fee" arrangements.
Other proposals are set to include speeding up a planned residence for legal aid cases which will require claimants to have lived in the UK for 12 months.
Law firms which are found to have abused the system could also face tougher penalties under the measures being considered.
A Number 10 source said: "The Prime Minister is deeply concerned at the large number of spurious claims being made against members of our armed forces.
"He is absolutely clear that action needs to be taken and has asked the National Security Council to produce a clear, detailed plan on how we stop former troops facing this torment."
The clampdown on the financial incentives will be accompanied by tough action against any firms found to have abused the system in the past to pursue fabricated claims.
Law firm Leigh Day has already been referred to the Solicitors Disciplinary Tribunal as a result of the failure to disclose a key document to the £31 million Al-Sweady Inquiry.
The inquiry concluded in its final report in December 2014 that allegations of war crimes following the Battle of Danny Boy on May 14, 2004 in southern Iraq were based on "deliberate lies, reckless speculation and ingrained hostility".
Once disciplinary proceedings have been completed against any firm, the Defence Secretary Michael Fallon has been ordered to prepare the ground for seeking to recover as much of the taxpayers' money spent on the inquiry as possible.
The Legal Aid Agency has also been asked to review all contracts to establish whether legal aid should be restricted on an interim basis in relation to any firm under investigation for misconduct, and whether such contracts should be scrapped entirely after disciplinary proceedings have been completed.
The source said: "It would be unprecedented for the Government to sue a law firm in this way - but if they are found to have acted improperly, then it will be the right thing to do. The public, and the soldiers who have been subject to malicious lies, would expect nothing less."
The action by the Prime Minister comes just days after Mr Fallon told MPs he was concerned about the "industrial scale" of claims against serving personnel and veterans.
The Iraq Historic Allegations Team (Ihat) has sent documents to around 280 veterans telling them they were involved in an incident under investigation.
Established in 2010 by the previous Labour government in response to allegations of murder, abuse and torture of Iraqi citizens by British service personnel, the multimillion-pound inquiry is still looking at investigating cases linked to the six-year military mission which came to an end in 2009.
Ihat's workload reached 1,515 possible victims by September, of whom 280 are alleged to have been unlawfully killed.
A spokesman for Leigh Day said the Prime Minister should not challenge the principle that "no one is above the law" and insisted the firm will "vigorously" defend itself before the Solicitors Disciplinary Tribunal.
The spokesman said: "Over the last 12 years many cases of abuse made against the MoD during the course of the occupation of Iraq have come to light and been accepted by the Government.
"They include the appalling torture and murder of Baha Mousa in 2003. In addition, the Government has paid compensation for over 300 other cases relating to abuse and unlawful detention of Iraqis.
"The vast majority of serving army soldiers do a first class job in protecting this country but the evidence shows that this is by no means the case for all.
"We have a system in this country that enables people to obtain justice if they have suffered abuse, damage or loss at the hands of anyone.
"No-one is above the law, not us, not the British Army and not the Government. We cannot imagine that the Prime Minister is proposing that this should change.
"We have made it very clear that we refute all of the allegations that have been laid before us by the Solicitors Regulatory Authority. We will contest those allegations vigorously before the Solicitors Disciplinary Tribunal."