By Emma Wilkinson
BBC News health reporter
Thalidomide caused extensive disabilities
The government has awarded £20m of funding for people disabled after their mothers took the drug thalidomide.
An apology will also be made in Parliament in the New Year.
Campaigners have long battled for additional support for the 466 UK survivors disabled by drug, prescribed from 1958-61 for morning sickness.
The money will be dispensed through a three-year pilot scheme by the Thalidomide Trust - and if successful the deal could be extended.
Developed in Germany in the 1950s
Prescribed as a 'wonder drug' for insomnia, coughs colds and headaches. Also given to pregnant women to relieve the symptoms of morning sickness
Link with birth defects shown in 1961 leading to the drug being taken off the market
Affected babies commonly suffered missing or deformed limbs and severe shortening of arms or legs
The drug also causes malformations of the eyes and ears, heart, genitals, kidneys and digestive tract and many babies would have died before birth
Until earlier this year it had not been clear exactly how Thalidomide caused birth defects but scientists now believe it affects the growth of new blood vessels in the developing embryo
One campaigner, Guy Tweedy, said he was "delighted" by the news.
Health Minister, Mike O'Brien said the arrangement would help thalidomide survivors meet their "changing and increasing health needs" as they approach older age.
"I know that this will be a much-anticipated early Christmas present for all those involved.
"I would also like to pay tribute to the work of the Thalidomide Trust and its officers, and members of the National Advisory Council who have worked tirelessly to champion the cause of thalidomide survivors, and whose contribution in supporting them and their families cannot be overstated."
Thalidomide was withdrawn after 2,000 babies were born with limb deformities and other damage.
In the 1970s, the drug's UK manufacturer, Distillers Biochemicals, paid out around £28m compensation following a legal battle.
Campaigners said they had wanted justice to help ease the lives of those who for 50 years have struggled daily with "terrible deformities".
They also hope a further £5m could be provided if Scotland, Wales and Northern Ireland contribute to the fund.
The Thalidomide Trust will be responsible for distributing the £20m Department of Health grant to help meet the health needs of those affected.
The Department of Health said it will also look at how this approach - working through an expert national body - might be applied to other small groups of patients who have specialised needs but are geographically dispersed.
Mr Tweedy said: "This is a significant day in the long-running battle to get a fair and just settlement for the victims of this wicked drug.
"Our campaign, which was fought with dignity and determination, has always been about justice and not entitlement."
Dr Martin Johnson, director of the Thalidomide Trust, said the present campaign team had been working for seven years to bring about today's announcement.
"We're absolutely delighted. The campaigners feel this is a very successful end."
But he added: "2009 is the 50th year of the first thalidomide babies being born in Britain and the thalidomide disaster is the biggest peace time disaster to happen in this country so it is surprising it's taken so long."
He said the money would enable people to pay for health care not available on the NHS and help with car and house adaptations to prevent further deterioration of people's mobility.