Under the law, speech deemed to incite unrest or religious or social tensions or which criticises traditional rulers can carry a three-year jail term.
Najib had said in 2012 that he would abolish the law, amid raft of political reforms.
However, Najib abandoned plans to repeal the law and said it would be strengthened to protect the sanctity of Islam and other religions.
"Having consulted with party leaders, including my deputy, vice-presidents, NGOs and the grassroots, as the Prime Minister, I have taken the decision to retain the Sedition Act," he told delegates from his United Malays National Organisation.
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Najib said the act would be strengthened in at least two areas.
"I have analysed the Act and found that two provisions are not there. Firstly, the further preservation of the sanctity of Islam as the official religion and also prohibiting other religions from being insulted," Najib said.