Petrol prices have surged by more than 15 percent in Australia over the past year, helping push headline inflation to 4.0 percent and posing a political headache for the government.
Prime Minister John Howard said his government would spend $1.576 billion dollars over the next eight years developing alternative fuel sources.
The centrepiece of the plan is a cash incentive scheme to encourage drivers to switch to LPG, which is in abundant supply in Australia given the country's natural gas and oil reserves.
In a statement to parliament, Mr Howard announced a cash grant of $1,000 toward the purchase of new, factory fitted LPG vehicles.
The government would also contribute $2,000 dollars toward the cost of converting vehicles to use LPG, which ranges from 2,500 to 4,000 dollars.
"This is a difficult time for Australians faced with high petrol prices and it is only appropriate that the benefits which accrue to Australia from our substantial resource base flow through beyond a narrow part of our society," said Mr Howard.
Mr Howard has described the rise as "the greatest worry of my political life" with a recent poll showing that 75 percent of respondents were unhappy with the government's response to the price hike.
Mr Howard said that the cost of LPG per litre was around 40 percent of the price of unleaded fuel.
The National Road and Motorists Association (NRMA) welcomed the LPG conversion subsidy, but said it would have a limited appeal.
NRMA president Alan Evans said LPG tanks used up plenty of room in car boots and the fuel was best suited for vehicles that were regularly driven long distances.