Chancellor George Osborne has scrapped August's planned 3p rise in fuel duty and frozen the tax for the rest of the year.
The £500 million boost to motorists can be paid as a result of departmental savings across Whitehall, said the Treasury.
Announcing the measure to cheers from Tory benches in the Commons, Mr Osborne said fuel duty would now be 10p a litre lower than under the plans inherited from Labour.
"We are on the side of working families and businesses and this will fuel our recovery at this very difficult economic time for the world," he said.
Labour had urged Mr Osborne to scrap the rise, with shadow chancellor Ed Balls calling for the Government to use the £500 million underspend from the Olympics to fund the move.
But Treasury sources insisted Mr Osborne's announcement had been under consideration for some time.
The Chancellor told the Commons: "The one-off cost of this change will be fully paid for by the larger-than-forecast savings in departmental budgets."
He said it was a sign the Government was "doing everything we can in very, very difficult economic circumstances for the world".
Conservative MP Robert Halfon, who has led the Commons campaign for a fuel duty freeze, said: "Motorists across the country will welcome the cut in fuel tax announced for August. It will greatly improve the performance of the economy."
But Labour MP Jim Cunningham asked why Mr Osborne did not announce the freeze when other Budget U-turns were unveiled over the so-called pasty and charities taxes.