SAN FRANCISCO—U.S. prosecutors abruptly amended the penalties they are seeking against PG&E Corp. in connection with a pipeline explosion that killed eight people in 2010, slashing the company’s potential fines in the case to $6 million from $562 million.

PG&E faces federal criminal charges that it violated pipeline safety laws and obstructed a probe into the pipeline explosion and fire in San Bruno, Calif., which also destroyed several dozen homes. Arguments in the trial concluded last week and the case is now before...