The car scrappage scheme is to be extended to cover an extra 100,000 cars and vans, the Government announced today.
Ministers allocated £300m to the scheme, under which motorists receive a £2,000 discount to trade in cars more than 10 years old for new models.
The money is expected to run out within weeks, prompting recent calls from industry groups for an extension.
Business Secretary Lord Mandelson told the Labour Party conference in Brighton there were encouraging signs that the economy was picking up.
"But recovery remains fragile and uncertain, especially in manufacturing and one of its cornerstones, the car industry," he said.
"Our car scrappage scheme has been so successful the money is running out. The industry has asked that the scheme be topped up. We cannot do everything, but that does not mean doing nothing.
"So today I am extending our popular car scrappage scheme with extra money for an additional 100,000 cars and vans," said Lord Mandelson, to huge cheers from delegates.
The announcement was warmly welcomed by industry groups and trade unions, which have joined forces to praise the scheme and call for an extension.
TUC general secretary Brendan Barber said: "This is a very welcome move.
"The economy is still in a very fragile state. Cutting off support of this kind or making cuts in spending could easily choke off the few precarious signs of recovery."
AA president Edmund King said: "Extending the car scrappage scheme will benefit the environment, road safety, businesses and less well-off motorists.
"The scheme has already transformed at least 250,000 10-year-old cars and vans into vehicles with 15 per cent better CO2 emissions, while keeping the network of car manufacturers, parts suppliers and dealer networks up and running in recession.
"It has also generated VAT revenue for the Government to make the scheme nearly self-financing and wipe out most of the impact on the taxpayer - VAT on a £7,000 car is £913, which with the £55 new car tax compares with the £1,000 Government grant for each vehicle.
"As more people begin to find work, perhaps requiring longer journeys, the chance to upgrade to a newer, more reliable, cleaner, greener, safer car will be crucial. In addition, with VAT returning to 17.5 per cent in the new year, cutting fuel and maintenance costs will be a welcome boost for lower-income drivers."
Steve Radley, director of policy at the Engineering Employers Federation, said: "Industry will welcome this decision as a recognition the Government understands the need to underpin such a key sector, protect vital supply chains and skilled jobs.
"There are big challenges ahead for the industry, but UK companies should be well placed to turn the shift towards low carbon vehicles into an opportunity. Continuing the scrappage scheme will help industry weather this storm, safeguarding its future and allowing a more orderly transition."
David Frost, director general of the British Chambers of Commerce, said: "I welcomed the announcement considering that demand is still uncertain, but that has to be it, given the state of the finances."
RAC motoring strategist Adrian Tink said: "This is good news for motorists who may have missed out on the original scheme and have been given a further opportunity to buy a safer, greener and more reliable car at a discounted price.
"However, with highly-publicised spending cuts in other areas on the horizon, the Government must avoid the temptation to make motorists fund this extension at the petrol pumps. We've already seen three rises in fuel duty in under 10 months. This shouldn't be an excuse for another."
The Government is putting an extra £100 million into the scheme, it was announced later.
So far 227,750 orders have been placed through the scheme, which will now be extended to cover up to 400,000 vehicles in total.
Ministers also announced that van owners will be eligible for the discount when their vehicles are eight years old, rather than the current 10.
Car owners will also get a boost, with the age qualification changed by six months to extend the benefits to cars registered on or before 29 February, 2000.
The scheme will come to an end in February 2010 or when the funding runs out, whichever is sooner.
Lord Mandelson said later: "The sector has been strongly affected by the recession, but the scrappage scheme has delivered a boost to manufacturers and the supply chain.
"We have listened to the concerns of manufacturers and are increasing the funding of the scheme to £400m.
"But we must make sure that the help we do offer is targeted, limited and proportionate. This is not a blank cheque to the auto manufacturers but recognition that there is still a short-term challenge to boost demand and confidence in the sector."