The reduction in the duty, which currently stands at 59p per litre, comes into effect from 6pm today (23 March).

Chancellor George Osborne also announced the fuel duty escalator that adds 1p to fuel duty on top of inflation every year will be scrapped for the rest of this Parliament.

The Chancellor introduced a Fair Fuel Stabiliser to protect motorists from bearing the brunt of oil price increases at the pumps. He said it would fund this through raising the supplementary charge on North Sea oil and gas production from 20% to 32% from this Thursday, 24 March.

So instead of reducing VAT on fuel to ease the squeeze on motorists, as Labour had demanded, oil producing companies will pay for the Fair Fuel Stabiliser when oil prices rise.

The Chancellor said the Fair Fuel Stabiliser would raise £2bn, which would be used to delay the inflation duty rise planned for next week until 2012.

Under the Fair Fuel Stabiliser when oil prices are high, fuel duty will rise by Retail Price Index only. But if the oil price dips below a set trigger price, likely to be $75 (£46) per barrel, the Government will increase fuel duty by RPI plus 1p per litre in each such year.

The main fuel duty rate is set to go up by 3.02p per litre on 1 January 2012.

The AA welcomed the cut in fuel duty as a “much needed tourniquet to drivers haemorrhaging money from record pump prices” but warned volatile oil prices could negate the benefit of the freeze on the fuel duty escalator also announced in the Budget.

AA president Edmund King said: “This action has probably stopped a 'summer of discontent' and is a common sense move. Any increase in duty would have bled many drivers on low incomes dry so this action offers short-term first aid."

He added that the Fair Fuel Stabiliser should bring more stability to the market.