Almost £2bn of taxpayers' cash is being given to London Underground to cover the collapse of the private maintenance firm Metronet.
Metronet went into administration after financial problems
A total of £1.7bn will be used to pay back the amount lenders made available to the company, which went into administration last July.
The deal was announced in addition to a 10-year £39bn funding package for Transport for London (TfL).
Critics said it represented a "bail out" of the firm but TfL denied this.
TfL's spokesman said the £1.7bn would have been paid back to lenders over the course of the public private partnership (PPP) deal had Metronet survived.
'More stable' future
The spokesman said: "It will have limited net impact on public finances since Metronet's borrowing was already part of the government's balance sheet."
Transport secretary Ruth Kelly said the funding package "carries forward our commitment to modernising and extending the capital's public transport system".
Metronet was responsible for maintaining two-thirds of the Tube network.
Created under a private-public financing initiative, Metronet announced last year it was no longer able to meet its obligations amid spiralling costs.
Ms Kelly added: "The settlement gives London Underground the resources needed to manage Metronet's administration and move toward a more stable long-term footing and continue the work to maintain, renew and upgrade the Underground."
TfL plans to take over Tube maintenance contracts from Metronet once it comes out of administration.
Most of the government's £39bn funding will be spent on the Tube, but it also included investment in TfL's contribution to the Crossrail scheme, preparations for the 2012 Olympics and the expansion of rail and bus services.
London's mayor Ken Livingstone said: "London's transport network underpins the capital's economy, which benefits the whole of the UK.
"This settlement recognises the crucial role transport plays in London's economic success and the importance of completing the renewal and expansion of the network that we have been driving forward since 2000."
But shadow transport secretary Theresa Villiers criticised the government's decision.
"The taxpayer is picking up a £2bn tab for Gordon Brown's incompetence when he set up the Metronet PPP. But the total cost of this shambles is still unclear," she said.
"It is unacceptable for Gordon Brown to heap further debt on the taxpayer without coming clean about the total burden they are expected to take on."
Liberal Democrat transport spokesman Norman Baker described the £1.7bn funding as "an appalling waste of public money".
"Just like Northern Rock, the private sector takes the profit when they can, and the public sector bails them out when matters go pear-shaped," he said.
"The taxpayers simply can't afford more of Gordon Brown's topsy-turvy economics."
Bob Crow, general secretary of the Rail Maritime and Transport union, said: "It was bad enough that Metronet's collapse cast a shadow over London's essential Tube upgrades, and it is scandalous that the public will have to pick up the £1.7bn bill to pay off its lenders."
He added: "The privateers were never going to lose from the PPP, and Metronet's shareholders are still raking in millions from the Tube contracts they awarded themselves."
Gerry Doherty, general secretary of the Transport Salaried Staffs Association (TSSA), said: "This was a huge gamble by Gordon Brown, the then Chancellor, which proves conclusively that the private sector cannot be relied on to deliver large-scale public sector transport projects on budget or on time."
However Brian Cooke, spokesman for passenger group London TravelWatch, welcomed the move.
"We hope the confirmation of funding means that TfL can now speed up any work on the transport network that may have been delayed because of fears that TfL would have to bear the cost of Metronet's collapse," he said.