Ministers bowed to campaigners and decided against making savage cuts to a fuel poverty programme.
The Government's £200m increase in funding for the Warm Front scheme reverses a £180m cut in its annual budget, from £375m to £195m, which had been due to take effect in April.
Some 75,000 vulnerable people will receive energy efficiency measures as a result of the U-turn.
Warm Front, in England, offers people on benefits or over 60 grants of up to £3,500 to pay for central heating, loft insulation, draught-proofing, cavity wall insulation and water tank lagging.
Campaigners had complained the cuts coincided with near-record energy bills and a trebling in five years of fuel poverty. The number of British homes spending at least one tenth of income on heat and power has soared to 6.6 million, while last month figures showed a 49 per cent rise in excess winter deaths to 36,700.
Announcing the change, Alistair Darling said: "Already 235,000 homes have benefited from the Warm Front scheme for more efficient heating and insulation for the most vulnerable. I can announce an additional £200m, from April, to help with energy efficiency.
"An extra 75,000 households will benefit from an extension of the Warm Front scheme. This will go alongside further requirements from the energy companies, up to £300m overall, to provide discounts on energy bills to another million low-income households."
The money from the energy companies related to "social tariffs" they currently offer but which will be made compulsory under the new Energy Bill . Meanwhile, the Chancellor froze the Winter Fuel Allowance at £250 for the under 80s and £400 for the over 80s.
Audrey Gallacher, of Consumer Focus, said: "The Chancellor should be commended. The additional money will help prevent thousands of low income households from suffering cold, damp homes and fuel bills they can't afford."