Ministers have signed off on a rescue plan for Flybe that will defer its tax liabilities in a bid to stave off the troubled airline's collapse.
Business secretary Andrea Leadsom said the package would help to protect jobs and give the firm a "sustainable" future, while government would also undertake a regional connectivity review.
Flybe, the biggest regional airline in Europe, had been forced to seek emergency funding amid heavy losses.
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Under the terms of the multi-million pound rescue deal, Flybe's shareholders will be asked to put more into the business while the government is believed to have deferred an outstanding £106m air passenger duty bill until the spring.
The government will also carry out a wider review of air passenger duty, which adds a £26 charge to short-haul return flights.
Leadsom said she was "delighted that we have reached agreement with Flybe's shareholders to keep the company operating, ensuring that UK regions remain connected".
She added: “My department and others across government have worked tirelessly in an incredibly short timeframe. This will be welcome news for Flybe, their customers and dedicated employees, as well as those in the supply chain. We will continue to work with Flybe and regional operators to find a sustainable long term future."
Alongside the specific agreement with Flybe, a Treasury review of Air Passenger Duty has also been announced as part of the Budget process to ensure regional connectivity is supported alongside the UK’s climate change commitments to meet net zero by 2050.
APD charges for short flights start at £13 for economy and £26 for business/first.
Chancellor Sajid Javid said: “I welcome Flybe’s confirmation that they will continue to operate as normal, safeguarding jobs in UK and ensuring flights continue to serve communities across the whole of the UK.
“The reviews we are announcing today will help level up our economy. They will ensure that regional connections not only continue but flourish in the years to come – so that every nation and region can fulfil its potential.”
The news has been welcomed by trade union the British Airline Pilots Association, which said the package was "good news for 2,400 Flybe staff whose jobs are secured and regional communities who would have lost their air connectivity without Flybe."
Flybe's boss Mark Anderson said: "This is a positive outcome for the UK and will allow us to focus on delivering for our customers and planning for the future.
"Flybe is made up of an incredible team of people, serving millions of loyal customers who rely on the vital regional connectivity that we provide."
However, the decision to review air passenger duty has already sparked anger among environmental campaigners, who argue that the tax helps to reduce carbon emissions by deterring short-haul flights.
Green MP Caroline Lucas said the move was "utterly inconsistent with any serious commitment" to tackle climate change.
"Domestic flights need to be reduced, not made cheaper," she said.
Her Green MEP colleague Molly Scott Cato meanwhile wrote in The Guardian: "The Government shouldn’t be throwing a lifeline to Flybe or encouraging the domestic aviation industry through tax cuts.
"On the contrary: we need to use all the instruments at our disposal to radically slash the number of domestic flights and invest in a local and regional transport revolution. We must ensure that the cheapest and most convenient transport option is always the sustainable one."
But transport secretary Grant Shapps defended the decision to review the levy.
"Air passenger duty is not designed as an environmental tax," he told ITV News.
"But actually, I think that we can do far more by reviewing the way it works.
"I'll give you a simple example: there are now aircraft that are being designed and about to start flying which fly on electricity. They're going to do the island hops in Scotland.
"And actually, we should be shaping our regional airports so that they become greener and they're able to fly using hybrid and zero carbon approaches like electric. That's the future and that's where we want to get to. And that's what this review will look into."
Shapps said his department would undertake “an urgent review into how we can level up the country by strengthening regional connectivity and will look at all the options that we have to make sure our airports can continue to play an important role in driving economic growth, creating jobs and greening aviation, across the country”.