Chancellor Gordon Brown has pledged to provide the military with the "longest sustained" increase in spending for two decades.
Up to £4.4bn has been made for operations in Iraq and Afghanistan
Speaking during his Spending Review, Mr Brown said the defence modernisation fund would be increased to £1bn over a period of three years.
Overall the budget for armed forces will rise by £3.7bn, from £29.7bn this year to £33.4bn by 2007-8.
This figure represents an annual real terms increase of 1.4%, he told MPs.
In Monday's speech, Mr Brown said the changes would help tackle "threats of international terrorism, the proliferation of weapons and a changing global environment".
According to the chancellor, around £4.4bn has been provided to date to meet the costs of British military operations in Iraq and Afghanistan.
To meet "other pressures which may arise from operations in the future", he said the Treasury would provide the Ministry of Defence with guaranteed access of up to £300m by 2007-8.
The boost came despite media reports that the MoD was set to receive its biggest spending cuts in 20 years.
These reportedly included 10,000 RAF personnel being cut and four of the Army's 40 battalions being axed.
The Defence Secretary, Geoff Hoon, welcomed the chancellor's defence spending plans, calling them "a vote of confidence in the superb performance of our Armed Forces".
Mr Hoon said the settlement "enables the continued modernisation of our Armed Forces against a backdrop of evolving threats to our security and advances in technology".
Mr Hoon said he would spell out what this means in practice next week.