The £500 million boost to motorists can be paid as a result of departmental savings across Whitehall, the Treasury said.
Announcing the measure to cheers from Tory benches in the Commons, Mr Osborne said fuel duty would now be 10p a litre lower than under the plans inherited from Labour.
"We are on the side of working families and businesses and this will fuel our recovery at this very difficult economic time for the world", he said.
Labour had urged Mr Osborne to scrap the rise, with shadow chancellor Ed Balls calling for the Government to use the £500 million underspend from the Olympics to fund the move.
But Treasury sources insisted Mr Osborne's announcement had been under consideration for some time.
The Chancellor told the Commons: "The one-off cost of this change will be fully paid for by the larger-than-forecast savings in departmental budgets."
He said it was a sign the Government was "doing everything we can in very, very difficult economic circumstances for the world".
Tory MP Sarah Newton (Truro and Falmouth), who was recently injured in a fall, told Mr Osborne: "If I weren't on crutches I would be jumping for joy."
But Labour MP Jim Cunningham asked why Mr Osborne did not announce the freeze when other Budget U-turns were unveiled over the so-called pasty and charities taxes.
The Chancellor said: "Last year we cut fuel duty and froze it. This year we have frozen it again. You should welcome that."
Economic Secretary to the Treasury Chloe Smith said pump prices were 10p a litre lower than under Labour's planned duty rises.
RAC Foundation director Professor Stephen Glaister said: "This is good news for drivers and good news for the country. Given that tax makes up around 60% of the pump price, falls in the price of oil were only ever going to go so far in easing the financial burden on motorists.
"Road transport powers the nation's economy and it is welcome that the Chancellor recognises the huge pressures the country's 35 million drivers are under with transport being the biggest single area of household expenditure bar none."
Contextual targeting label: