The UK's charity sector is facing an overhaul under draft legislation to be introduced during this session.

The regulation of charity fundraising will also be overhauled, with a new crackdown on street collections - although a system of self-regulation appears set to remain.

Announcing the legislation, the home secretary said: "I believe that a diverse and vibrant charitable sector is essential for the health of our democracy.

"The draft charities bill would reform the framework in which charities operate enabling them to thrive, grow and realise their full potential."

Charity law will be modernised, but it will also be overhauled to stop bogus or overtly political organisations achieving charity status.

The move follows the case of a North London mosque where a Muslim extremist hid behind his group's charitable status to peddle anti-Western propaganda.

The legislation will provide a clear definition of charity, where the emphasis will be put on "public benefit".

Charitable status will be given to human rights organisations and to amateur sports clubs.

The 12-strong criteria will include a commitment to the "advancement of education" - a sign that independent schools will retain charitable status.

The legislation will also contain a range of measures to enable charities to administer themselves more efficiently and to be more effective in their work.

Tens of thousands of small charities, whose total budgets are less than £5,000, will no longer need to register.

Under the draft legislation the Charity Commission's functions and powers will also be overhauled.

The chief charity commissioner, John Stoker, said: "Key among these are a new legal definition of charity, legal powers to help charities adapt to changing circumstances and a larger board for the commission which would allow us to draw on a wide range of skills and experience for our work. I warmly welcome this announcement."

The Charity Finance Directors' Group also welcomed the legislation - but warned the media against focussing on perceived negative aspects public fundraising.

Shirley Scott, the organisation's chief executive, said: "We are pleased that the government have recognised the huge importance of charities, and the need for regulatory reform, by placing a draft bill in the Queen's Speech.

"We are looking forward to seeing the definitions of charitable purposes being set out in a modern statute, instead of being based on case law and analogy going back 400 years."

Stuart Etherington, the chief executive of the National Council for Voluntary Organisations, added: "NCVO and members of the Charities Bill Coalition are delighted that the Charities Bill was included in the Queen's Speech.

"Both the voluntary sector and the Home Office have worked very hard to get this far and inclusion of the bill will ensure that the principle of public benefit is enshrined in legislation, further enhancing public trust and confidence within the sector."