Business Secretary Lord Peter Mandelson made the announcement on a visit to the Filton Bristol, plant of Airbus UK which will be making the wings for the new plane.
The government assistance will create and sustain more than 1,200 jobs at Filton and at Airbus UK's Broughton plant in north Wales.
Described as repayable launch investment, the government assistance is drawn partially from its 750 million pounds strategic investment fund and will help create and sustain more than 5,000 jobs within the supply chain across the UK.
The A350XWB (extra-wide bodied) project consists of three planes capable of carrying 270-350 passengers.
The French and German governments have already announced support for the A350 and Spain, the other Airbus partner country, is still in discussion with Airbus.
Lord Mandelson said on Friday: "This agreement is excellent news for the UK aerospace sector and for the thousands of British workers within Airbus and its UK-based supply chain.
"The UK's aerospace industry is world-class and capable of competing successfully with companies across the world. We recognise the vital role Airbus, and its supply chain plan in the UK."
Lord Mandelson said the sector provides high-quality, highly skilled employment.
"Aerospace is a sector that we are rightly proud of in the UK. It stimulates innovation across industry, demonstrates our capability to work with the most advanced technologies, and provides high-quality, highly skilled employment. It is a sector at the heart of our advanced manufacturing strategy," he said.
The business secretary said the agreement is further evidence of the government's long-term commitment to the UK aerospace industry and its future success. "Aerospace is one of the UK manufacturing's crown jewels," he underlined.
Airbus, a division of the European aerospace giant EADS, intends to launch the A350 as a rival to Boeing's 787, which is planned to come onto the market in 2009.
Airbus president and chief executive Tom Enders welcomed the government's decision to invest in the A350 XWB, 'the most advanced, innovative and eco-efficient aircraft in its market segment'.
"This partnership with the UK government means that the UK taxpayer can expect a sound return on their investment, and ensure the aviation industry continues to thrive in Europe and around the world," Enders said.
At the Paris Air Show in June, France said it would provide funding of euro 1.4 billion ($1.94 billion) while Germany pledged up to euro 1.1 billion ($1.52 billion).