British Councils are to be given powers to stop funding early-years providers with links to extremism, Education Secretary Nicky Morgan has announced.
The move, in England, follows a letter-writing campaign by the British Humanist Association.
Members wrote to MPs and responded to a nursery funding consultation, raising concerns about extremist links and creationist teaching in some nurseries.
The Department for Education said the change closes "a technical loophole".
Mrs Morgan said that toddlers must learn "fundamental British values" and that schools and nurseries that do not "support this aim" should not receive public money.
The move comes after allegations that hardline Islamists tried to take over Birmingham schools in what was dubbed the Trojan Horse plot.
The BHA says about 450 of its members responded to a recent government consultation, asking for funding to be withdrawn where there were concerns that nurseries were being run by people with "extremist views" or who promoted creationism as a scientific fact.
About 1,000 people also wrote to their MPs.
Announcing the measures, Mrs Morgan, who replaced Michael Gove as education secretary in last month's Cabinet reshuffle, said there is no place for extremism "anywhere in the education system".
Funding would be withheld from establishments that teach creationism as scientific fact, Mrs Morgan said.
A Department for Education spokeswoman said the change brings nurseries into line with schools where funding can be withdrawn if there are concerns about "extremism", pending investigation by Ofsted.
Inspections will also include checks to ensure early-years providers promote British values.
Early-years children will be taught about learning right from wrong, learning to take turns and share, and to challenge negative attitudes and stereotypes.
"One of the most important roles of the education system is that it should prepare young people for life in modern Britain," Mrs Morgan said.
'Aggressive Islamist agenda'
"I am clear that public money should not be used to support any school or early-years provider that does not support this aim because it seeks to promote ideas and teachings that run counter to fundamental British values."
The government will launch a consultation to seek views on the proposals from the public and early-years providers.
Andrew Copson, the BHA chief executive, welcomed Mrs Morgan's decision.
The National Union of Teachers said it agreed religious extremism has no place in schools - but Deputy General Secretary Kevin Courtney commented: "It is disappointing that it is the notion of extremism which is the subject of the first major announcement of the new Secretary of State.
"Early years and school staff already teach children right from wrong.
"Asking Ofsted to inspect how well nurseries are teaching 'fundamental British values' does not appear to offer anything new for children and will concern all those who seek to promote community engagement."
Neil Leitch, chief executive of the Pre-School Learning Alliance said the term 'British Values' was "difficult to define and often subjective so we cannot see how stipulating 'British Values' or the state of 'Britishness' adds anything that could ever be meaningful to the experiences of young children."
Liz Bayram, chief executive of the childcare association PACEY, pointed out that concepts of democracy, law and individual liberty "are very challenging concepts for the under fives".
Ms Bayram said the vast majority of nurseries and childminders were "doing a really good job and no evidence of extremism has been found. This is a big reaction to an issue that may not even be there and could be tackled by what's already in place".