The home secretary has decided against reversing the decision two years ago to downgrade cannabis to a class C drug.
Cannabis was downgraded to class C two years ago
Charles Clarke said he accepted the drug could trigger serious mental illness but pledged a publicity campaign to warn of the dangers.
He also announced a wholesale review of the way drugs are classified.
The Conservatives described Mr Clarke's decision not to reclassify cannabis as a "tragedy" but it was "strongly welcomed" by the Liberal Democrats.
Mr Clarke told MPs the decision was supported by police and most drug and mental health charities.
Mr Clarke's proposals to review the classification of drugs - which will be detailed in a consultation paper - could lead to a complete overhaul of the system.
He said the existing system - of Class A, B and C substances - could confuse people and had led some to misinterpret the downgrading of cannabis.
Mr Clarke said he will launch a major public information campaign to stress that cannabis was "anything but harmless".
He also said that draft guidelines published in November which would have allowed people to carry up to half a kilogram of leaf cannabis for "personal use" will be watered down.
"Everyone needs to understand that cannabis is harmful and it is illegal," he told MPs. "Our education and health campaigns will clearly transmit that message."
Class A: Seven years for possession, life for supplying
Class B: Five years for possession, 14 for supplying
Class C: Two years for possession, 14 for supplying
Mr Clarke will also order police forces to clamp down on cannabis producers and dealers, a move welcomed by the Association of Chief Police Officers.
The inquiry will also look into the classification of "date-rape" drugs including GHB and Rohypnol.
Liberal Democrat home affairs correspondent Mark Oaten said his party "strongly welcomed" the decision not to reclassify cannabis.
Mr Oaten said he was pleased Mr Clarke had taken the decision "on evidence rather than political pressure".
But shadow home secretary David Davis said Mr Clarke should have "grasped the nettle", saying cannabis was a "gateway to... hard drugs".
"The fact that he has not followed through and taken the new evidence into account is both a missed opportunity for him, but more importantly a tragedy for many thousands of young lives," he said.
Concerns about a link between super-strength cannabis varieties and mental illness have mounted since Mr Clarke's predecessor David Blunkett downgraded the drug in January 2004, making cannabis possession a non-arrestable offence in most cases.
According to the Home Office, most offences of cannabis possession by adults resulted in a police warning given on the spot, and confiscation of the drug.
There is a presumption against arrest, except where public order is at risk, where children are vulnerable or for repeat offenders. Young people under 18 are given a formal reprimand or warning at a police station.
Where conviction occurs, Class C drug possession carries a two-year sentence, with 14 years for supplying the drug. In the case of Class B drugs, possession carries a five-year sentence, with 14 years for supply