Facebook Beacon, which was introduced last month, tells website users and their online friends which websites they have visited recently, without their consent.
The service was criticised by users who said it had turned the members-only website into an "open diary" of people's online habits. More than 50,000 users signed a petition last week asking Facebook to stop abusing privacy issues on the site.
Beacon was introduced by Facebook as part of its Facebook Ads programme, a new ad platform to help generate greater revenue for the company's partners.
Mark Zuckerberg, chief executive of Facebook, said: "We've made a lot of mistakes building this feature, but we've made even more with how we've handled them. We simply did a bad job with this release, and I apologise for that. "
Zuckerberg added that it had taken too long to respond to people's concerns about Facebook Beacon, and that "instead of acting quickly, we took too long to decide on the right solution. I'm not proud of the way we've handled this situation and I know we can do better."
Facebook is now allowing users the ability to opt out of its new ad serving system altogether, after admitting a major error of judgement.
The system, which was originally introduced as an opt-out feature, tracks which other websites Facebook users had visited to make online purchases. Facebook would then send users a pop-up window telling them it was sending the information to their newsfeed.
However, if users did not opt out quickly enough Beacon would send through the details automatically and share the information with other users.