The Chancellor pledged £6bn for the war on terror, and stressed that Britain was prepared to accept all its existing military commitments abroad.
Gordon Brown had been widely expected to take the axe to defence spending, with a cut of up to £4.5bn predicted and the loss of thousands of jobs.
Although the funds provided by Mr Brown are earmarked for countering terrorism, critics will point to the fact that a large proportion of it will be spent on military operations abroad.
However, the Chancellor insisted yesterday that the defence budget was going up in real terms.
Mr Brown said: "It has been put to me that we freeze the defence budget and cut it in real terms. "At a time when our forces are now serving in Iraq, Afghanistan and Kosovo as well as Northern Ireland and elsewhere, this course would be irresponsible, contrary to the national interest and I reject it."
The Chancellor said that further details would be announced in the Spending Review in July.
The Ministry of Defence has come in for sustained criticism for supposed profligacy. A £3bn rise in the cost of new equipment has been cited as an example of maladministration.
Geoff Hoon, the Secretary of State for Defence, is said to have appealed directly to the Prime Minister in an effort to avoid severe cuts from Mr Brown.
Military chiefs pointed out that one of the reasons for the high cost of equipment for the Iraq war was that orders were delayed so that the Government would not be seen by the public to be preparing for war.
The threat of Islamic terrorism, brutally highlighted by the Madrid bombings last week, also persuaded the Chancellor that additional funds must be spared for security. Last week, it was revealed that Mr Hoon had written to Mr Blair warning that military operations would be put at risk by demands for a £1.2bn cut in defence spending plans.
In his statement Mr Brown did not spell out the size of the real-term increases, nor specify a time frame.
The MoD already knows its overall budget for the next two financial years, but the figures after that will not emerge until the Chancellor unveils his next three-year spending review in the summer.
The shadow Defence Secretary Nicholas Soames questioned the extent of Mr Brown's commitment to the defence budget. "We welcome this increase only if it materialises, and if it is indeed new money, and provided that it goes into the front line and not to funding further waste on bureaucracy and more civil servants," he said.
"The Conservative Party regards front-line defence as an absolutely fundamental priority. When we announce our detailed spending plans later in the year we will make clear how we intend to shift money from unnecessary and inefficient back-office expenditure to the front line in order to maintain and enhance defence capabilities," Mr Soames added.
However, Mr Brown's words were undoubtedly aimed at embarrassing the shadow Chancellor Oliver Letwin, who has committed the Tories to a cash freeze on defence spending - in effect, a real terms cut.
And they came hard on the heels of Mr Blair's observation during Prime Minister's Questions that the al-Qa'ida terror group would be dealt a "hammer blow" if British forces helped to transform Iraq and Afghanistan into stable and prosperous states.Reuse content