An optical power regulator employs a variable optical attenuator having a first birefringent element that spatially separates the input optical beam into two orthogonally-polarized beams. Both beams pass through a polarization modulator (e.g., a liquid crystal material) that rotates their polarizations to an extent determined by the control voltage applied across the polarization modulator. A final birefringent element spatially separates both beams exiting the polarization modulator into two pairs of orthogonally-polarized beams (i.e., two horizontally-polarized and two vertically-polarized components). The thicknesses and optical properties of the birefringent elements are selected so that two of the four beams are combined by the final birefringent element to exit at the output port of the regulator, while the remaining two beams are blocked. As a result, the degree of attenuation is determined by the degree of polarization rotation by the polarization modulator, which in turn is a function of the control voltage applied to the polarization modulator. Preferably, the liquid crystal material used in the polarization modulator has a high optical birefringence and a low dielectric anisotropy, which results in a relatively shallow attenuation curve as a function of applied voltage. The intensity of the optical signal is measured by a photodetector and used by a controller to output the control voltage applied to the liquid crystal material to maintain a desired optical power level at the output port of the regulator.