The Department for Transport has signed a public service obligation (PSO) with Dundee City Council to keep the £2.85 million London Stansted route open.
LoganAir will operate the twice-daily service from July 2014, with flight times between the two airports about an hour and a half.
The funding comes from the new Regional Air Connectivity fund announced in the last spending round by Chief Secretary to the Treasury Danny Alexander, who said he is "delighted" it is delivering for Dundee.
Mr Alexander said: "Dundee is a key economic hub in Scotland's thriving economy.
"This will ensure that its key industries remain connected to the rest of the UK. It's good news for the people of Dundee and shows how we are better-off together."
Ken Guild, leader of Dundee City Council, said: "Flights to and from London continue to play an important role in Dundee's long-term regeneration and our position in the country.
"With the service now secured through this PSO, the council and its partners will carry on encouraging as many people as possible to make use of the London link."
The funding marks the first UK government PSO and follows an application by the council for support from the fund, which was set up to maintain important regional air connections where they are in danger of being lost.
A similar agreement is expected for the Newquay to London air link after Flybe announced it would no longer operate the route from October 2014.
UK Aviation Minister Robert Goodwill said: "This funding from the Regional Air Connectivity fund, the first of its kind, is good news for Dundee and its economy, whether it's the world-class research being carried out at the University of Dundee or the city's financial-services sector.
"Regional airports have a key role to play in our long-term economic plan for the nation's future prosperity and the Government is committed to ensuring they have access to London and vice versa."