Chancellor George Osborne has scrapped August's planned 3p rise in fuel duty and frozen the tax for the rest of the year.
The £500m boost to motorists can be paid as a result of departmental savings across Whitehall, the Treasury said.
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.
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.
The Chancellor said: "Last year we cut fuel duty and froze it. This year we have frozen it again. You should welcome that."
Economic Secretary to the Treasury Chloe Smith said pump prices were 10p a litre lower than under Labour's planned duty rises.
She added: "They scheduled in 12 fuel duty rises while they were in office and six more for afterwards."
RAC Foundation director Professor Stephen Glaister said: "This is good news for drivers and good news for the country. Given that tax makes up around 60% of the pump price, falls in the price of oil were only ever going to go so far in easing the financial burden on motorists.
"Road transport powers the nation's economy and it is welcome that the Chancellor recognises the huge pressures the country's 35 million drivers are under with transport being the biggest single area of household expenditure bar none.
AA president Edmund King said: "This is great news for all motorists as drivers will breathe an enormous sigh of relief with summer holidays about to take off.
"A duty increase at the same time as the Olympics would have cast a shadow over the UK."
He went on: "What we now need more than ever is fuel price transparency to make absolutely sure these benefits are passed on to drivers in their entirety.
"Today's announcement and (Transport Secretary) Justine Greening's call for fuel price transparency has placed this Government at the forefront of looking out for the interests of drivers, business and families."
Mr King said deferring the 3.02p-a-litre increase until next year will spare a two-car family from a £6.41-a-month leap in petrol costs.
Had it gone ahead, from petrol sales alone, it would have siphoned £1.6m a day from consumer spending into the pump and knocked out a third of price cuts since the record highs in mid-April.