Arduino How to improve laser detection on photodiode

The peak spectral response of your photodiode is actually about 580 nm. So get rid of the blue/white LED, and go with a yellow-green ultra-high-brightness LED. Then get a narrowband filter at about the wavelength of your LED. Thorlabs, for instance, has a good selection for not too much money http://www.edmundoptics.com/optics/optical-filters/bandpass-filters/visible-bandpass-interference-filters/3429/. Don't worry too much about perfect matching of your filter and LED, LEDs usually have a pretty wide (10's of nm) spectrum. The use of a narrow-band filter will be critical in getting rid of unwanted sunlight.

Once you've done that, get a better op amp. If you're trying for cheap, even something like a TL081 will be better than an LM358. You'll have to use a split supply, something like +/- 12 or +/- 15 volts. Get over it. You need a split supply anyways in order to bias your photodiode. If you really don't like providing a higher supply voltage, and LF356 will work fine at +/- 5 volts. Also be aware that you probably should put a small capacitor across your feedback resistor for stability.

This may or may not fix your problem - it will help, but it may not be enough. There are two ways to work around this. The first is to get a second photodiode, and use a different filter on the input, with (let's say) a 100 nm difference in filter wavelength. Just as an example, let's say you use a 580 nm and a 680 nm filter. Both will receive about the same amount of power from sunlight, but only the 580 will get LED power. So you would detect a return only if a) the 580 signal level is high enough, and b) the 680 signal is distinctly lower, like less than 1/3 of the 580 signal.

If this doesn't work, you would need to modulate your LED, and look for the right frequency in the 580 return. The simplest (and least effective) approach is simply to put a bandpass filter on the 580 signal, so only the LED variation gets through. For tougher cases, you need a synchronous demodulator, which sounds scary but can be as simple as an op amp and a FET. See http://www.analog.com/media/en/technical-documentation/technical-articles/Use-Synchronous-Detection-to-Make-Precision-Low-Level-Measurements-MS-2698.pdf, figure 4. This is also called a lock-in amplifier. If you're willing to learn how to use one, you can do amazing things pulling a signal out of noise and background.

You can operate the photodiode in "photovoltaic" mode and then you don't need a negative supply. In this case the diode generates a current in the same way as a solar cell. You may give up some speed and sensitivity operated in this way.

It requires an opamp that can operate with zero volt at the inputs (the LM324 can), these are often referred to as "single supply" opamps. A CMOS input opamp would be better as the bias current won't cause problems.

The circuit is below. Depending upon the capacitance of the diode and the wiring (don't use long leads to the photodiode) you may need the capacitor C1 to avoid instability.

^{simulate this circuit – Schematic created using CircuitLab}