Chancellor George Osborne has announced that fuel duty will be frozen for the rest of the year, cancelling a planned increase in August.
Fuel duty was due to rise by 3p a litre in August. Hauliers and motoring associations had called on Osborne to cancel the hike in his budget earlier this year.
At the time the Chancellor insisted the hike would go ahead, so his U-turn on Tuesday is yet another plank of the Budget to be reversed. It follows policy reversals on the Pasty Tax and the Charity Tax.
The government says its series of freezes on fuel duty mean that petrol is 10p cheaper than it would have been if all the rises had been introduced.
The Treasury said the U-turn was triggered by the deteriorating economic situation and that senior ministers had been considering the move for some time.
The move comes at an interesting moment because the price of oil is currently falling on world markets and will cost the Treasury more money, at a time when figures show that George Osborne is having to borrow more money than expected, because the double-dip recession is causing income tax receipts to fall and welfare payouts to rise.
The Treasury rejected claims that the move was in response to calls from Labour's Ed Balls earlier on Tuesday, who said the £500m underspend at the Olympics should be channelled into a petrol tax cut.
Speaking in the Commons shortly after the announcement Balls told MPs: "We've now had U-turns on pasties, churches, caravans, skips, and today a U-turn on fuel, which we welcome.
"It would be interesting to know at what point the decision was made and if the transport secretary was told," Balls went on, calling on the chancellor to perform further U-turns on tax breaks for millionaires and the so-called Granny Tax.
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".
Business groups have welcomed the move, but the Federation of Small Businesses called on George Osborne to introduce a "Fuel Stabiliser" to reduce volatility in petrol prices.