High sulfur content in gasoline creates more pollutants and adds to smog and soot in the air.
Supporters of the new rules hailed the move as a crucial step in Obama's second term as president, and the equivalent of taking more than 33 million cars off US roads.
"We know of no other air pollution control strategy that can achieve such substantial, cost-effective and immediate emission reductions," said S. William Becker, executive director of the National Association of Clean Air Agencies.
Lawmakers who opposed the release of the proposal, known as Tier 3, said it would raise costs for consumers in an already struggling US economy.
"The EPA continues to disregard the facts and potential economic costs of Tier 3, when consumers and our economy can't afford gas prices going up even further," said Louisiana Republican Senator David Vitter.
"This move signals a frightening flood of new rules," he said.
The proposal now faces a period of public comment before it can be finalized.