The change, which comes into effect tomorrow, raises the threshold on which 1 per cent stamp duty is paid from its current level of £125,000.
The move will save eligible home-buyers up to £1,750 when they purchase a property, and relates only to buildings entirely for residential use.
In a statement, the Treasury said: "The Chancellor of the Exchequer has today announced that stamp duty land tax will not apply to purchases of residential property of £175,000 or less.
"This will provide an exemption from stamp duty land tax for land transactions consisting entirely of residential property where the chargeable consideration is not more than £175,000.
"This relief will apply to transactions with an effective date on or after 3rd September and before 3rd September 2009."
The Treasury estimates that the one-year stamp duty freeze will cost the Government £600m - suggesting that it expects about half a million home-buyers to benefit from the change.
Around half of the 90,000 home purchases completed each month are on properties worth £175,000 or less, but deals below £125,000 are already exempt from stamp duty.
The average price of a home in the UK was just under £165,000 in August, according to the Nationwide Monthly House Price Index.
The plan for a stamp duty freeze first emerged last month but was met by official silence - leading to claims that the housing market had been paralysed by dithering between the Treasury and Downing Street.
Today's announcement came as Communities Secretary Hazel Blears unveiled a further package of measures to revive the housing market, including help for first-time home-buyers and people at risk of repossession.
A mortgage rescue scheme will allow those facing repossession to sell their home to a registered social landlord (RSL), who will clear the mortgage and then rent it back to them at a level they can afford. In some cases, the RSL could buy a share in the property, or provide an equity loan to help reduce the homeowner's mortgage repayments.
Under the new HomeBuy Direct scheme, first-time buyers with a household income under £60,000 will be able to buy newly-built properties with a free-of-charge equity loan of up to 30 per cent of the property's value, co-funded by the Government and the developer.
The Government is also planning to bring forward funding for social housing from existing budgets to deliver more properties sooner, with local authorities which manage their own housing stock able to apply for a grant to build social housing alongside RSLs.
Ms Blears said the measures, which apply only in England, were not aimed at people who had been reckless in their borrowing but at "decent" families who might find themselves in difficulties.
"We are looking at about £200m over the next couple of years for families who are struggling with mortgages, there will also be £100m to help with mortgage interest payments to keep people in their homes," she told BBC Breakfast.
"I think that is a very good use of money because otherwise you do end up spending a fortune... it is not just bricks and mortar when you get repossessed, it can destroy whole families."
Ms Blears said the measures were not going to "transform the world" but they were going to "make a big difference to those people that are struggling".
Referring to first-time buyers, Ms Blears told the BBC Radio 4 Today programme: "We can't run people's lives but we can try and help. What we're saying is... we will help you get the deposit so you can get the mortgage and you can get into the housing market."
Ms Blears said the housing plans would be paid for with money that the Government had "scheduled to spend in the next couple of years or so".
She said: "I think it is sensible Government policy to say let's bring forward that money so that people who are struggling can be helped, first-time buyers can be helped and we get more rented housing."
The initiative is part of a wider series of announcements which will be made in due course to help alleviate the pressure on consumers and the industry.
Ministers hope they will help shift some of the focus away from what has been a dreadful summer for Labour, with talk of a threatened coup against the Prime Minister and accusations of "dithering" over issues such as stamp duty and a windfall tax on the energy companies.
Yesterday Mr Darling was accused of "talking the economy down" as the pound slumped against the euro and dollar in the wake of his claim that Britain was facing the worst economic crisis for 60 years.
Recent figures show that the number of homes being repossessed hit their highest level for 12 years during the first half of the year, with 18,900 properties taken back by lenders, 48 per cent more than during the same period of 2007.
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