The decision to cut the fuel excise from the start of April will save motorists about $19 on a 65-litre tank, or 26.3 cents a litre, Prime Minister Anthony Albanese said after a meeting of national cabinet on Monday.
State and territory leaders also ratified a plan to respond to the economic shockwaves from the war in the Middle East, which may include fuel rationing if supplies of oil begin to dry up.
"The longer this war goes on, the worse the impacts will be," Mr Albanese told reporters at Parliament House in Canberra.
"I and the government understand that people are really worried but we have a plan to get through this."
The framework for responding to fuel shortages has four levels of action: plan and prepare, keeping Australia moving, taking targeted action, and protecting critical services for all Australians.
The second level - keeping Australia moving - was in force, Mr Albanese said.
Under the third level - taking targeted action - governments will look for "practical measures" to reduce people's fuel use.
The highest level of response would require stronger demand measures to ensure emergency services, utilities and other critical workers can get access to fuel.
Senior ministers have previously said rationing and COVID-style mandates were a last resort, preferring voluntary steps like encouraging Australians to work from home where possible.
Along with cutting the fuel excise, the government will also cut the road-user charge, which affects heavy vehicles.
The two measures would work in tandem to provide cost-of-living relief, Treasurer Jim Chalmers said.
Together, the reduced tax and levy incomes would cost the budget $2.55 billion over the three-month period.
A scheduled increase to the heavy vehicle road user charge will also be delayed by six months, costing an additional $53 million in foregone revenue.
Dr Chalmers said he had asked the consumer watchdog to ensure the price cut was passed on to consumers.
"If you do the wrong thing by Australian motorists and Australian truckies, the ACCC will come down on you like a tonne of bricks," he said.
Opposition Leader Angus Taylor had been calling for the fuel excise to be cut since Friday, and on Monday accused the prime minister of being the "last to lead" in a national crisis.
"Australian families and small businesses will pay less for fuel because the coalition led and the government followed," he said in a statement.
"We welcome the national fuel security plan, but the reality is we still do not have a clear plan to get fuel to the servos that have run dry."
The National Road Transport Association said the cut to the road user charge was welcome, but many freight operators would still be under financial pressure.
"These companies still have March's fuel bill to pay," the association's chief executive Warren Clark said in a statement.
"Fuel prices remain high, cash flow is tight, and businesses are working hard to stay on the road."
Earlier, Energy Minister Chris Bowen introduced emergency legislation to parliament, allowing the government to take on the financial risk of importing extra fuel into Australia.
"The risk premium for purchasing discretionary cargoes is rising," he told parliament.
"Work to scope deals and secure additional fuel is already under way."
"That's why today's bill is so urgent. This bill creates a strategic reserve to secure the supply of strategic materials that are vital for Australia's economy."
The laws are expected to pass the lower house with bipartisan support on Monday and be debated in the Senate on Tuesday.Â
Australia has 39 days of petrol, 30 days of diesel and 30 days of jet fuel stockpiled, Mr Bowen said.
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