A method and network node for generating and applying policy rules in an IP network. A Policy Enforcement Function (PEF) is implemented in a node such as a Gateway GPRS Service Node (GGSN) routing packet flows to and from network users. An Application Function (AF) determines source and destination addressing information for a packet flow and sends the information to a Policy and Charging Decision Function in a Policy and Charging Control Function (PCRF) having access to service and mobility policies for network users. The PCRF generates policy rules based on the addressing information and the appropriate service and mobility policies. The PCRF sends the policies rules to the PEF for application to the traffic flow.