Wootton Bassett is to be the first town in more than 100 years granted the title "Royal" in recognition of its parades for fallen soldiers, David Cameron has announced.
The Prime Minister confirmed that troop repatriations would no longer happen via the Wiltshire town from September due to the closure of a nearby RAF base.
But he said the Queen had agreed to the tribute as "an enduring symbol of the nation's admiration and our gratitude to the people of that town".
"Their deeply moving and dignified demonstrations of respect and mourning have shown the deep bond between the public and our Armed Forces," Mr Cameron told the Commons.
The Prime Minister made the announcement after making his regular tribute at the start of question time to the most recent military casualty in Afghanistan.
"The town will become Royal Wootton Bassett later this year in a move I believe will be welcomed right across our country."
In a written ministerial statement, Defence Secretary Liam Fox confirmed that repatriation ceremonies for those killed in operational theatres will move from RAF Lyneham to RAF Brize Norton in Oxfordshire.
"I would like to thank RAF Lyneham for their excellent work in supporting the important task of repatriation ceremonies," Dr Fox said.
"I am certain that RAF Brize Norton will maintain the standard of solemnity, dignity and respect to our service personnel killed on operations as shown by the personnel at RAF Lyneham.
"I would also like to record publicly my thanks to the people of Wootton Bassett who have chosen to pay their respects in a unique and special way.
"It is such spontaneous public support that captures the spirit of the British people, and I am very grateful for those who have participated.
"Such gestures do not go unnoticed by those deployed on operations."
Mary Champion, Mayor of Wootton Bassett, said: "This is a great honour for our community as the repatriations move away from Wootton Bassett.
"Whilst we have never sought recognition for our simple act of respect I am certain that this will serve to reinforce the pride and gratitude we feel for the members of our armed services who will always be in our thoughts."
Peter Doyle, of Wootton Bassett Town Council, said the honour would be received with "gratitude" by the people of the town and surrounding area.
But he added that the most the town had ever expected was to strengthen the covenant between the British people and their Armed Forces.
"The town has found itself during the course of the repatriations in front of the nation really through an accident of geography due to our proximity to RAF Lyneham," he said.
"I think most people in the town would recognise and hope that any town in a similar situation would have done likewise.
"If we have helped do anything to promote the covenant that people have with our Armed Services and serving personnel then it may serve as an example to other communities - but that was the most reward that anyone in the town ever expected.
"I do not think anyone expected this but nevertheless it will be received with gratitude."
Mr Cameron was urged to lead future tributes to fallen troops in Carterton - the nearest town to Brize Norton - which lies in his Oxfordshire constituency of Witney.
Conservative MP James Gray, whose North Wiltshire constituency includes Wootton Bassett, told the House of Commons: "The people of Wootton Bassett have sought no thanks or praise for what they have done on so many hundreds of occasions, but they will be deeply honoured and very pleased by the honour which Her Majesty has shown them on this occasion."
He asked Mr Cameron: "Will the Prime Minister now lead the people of Carterton in his own constituency in filling the place which they filled?"
Mr Cameron responded that it had been an "honour" for him to announce the royal recognition of the people of Wootton Bassett.
"They did not ask for any recognition, they did not ask for any form of preferment," said the PM. "They just believed that they were honourably and honestly doing a job that the whole country wanted to see done.
"Now that the route is going to be going a different route, we have to look at the issues which (Mr Gray) raises.
"Already there is quite a demonstration of solidarity and support outside the John Radcliffe Hospital (in Oxford). I will certainly bear in mind what he says."