UK citizens who have been victims of terrorism abroad will be entitled to compensation for the first time, Justice Secretary Ken Clarke has said.
All those affected by terrorist attacks since 2002 will be eligible for support from April 2013, Mr Clarke told MPs.
The move is part of changes in help for victims of crime which Mr Clarke said would deliver a "better deal" for them.
Labour welcomed the move but said it was "shameful" it had taken so long and victims' support was insufficient.
The move has had cross-party support for some time amid complaints that those suffering serious injuries in terrorist attacks abroad and relatives of those killed are discriminated against in the current criminal justice system.
In future, Mr Clarke said overseas victims would have "exactly the same" access to compensation than those involved in domestic incidents through the taxpayer-funded Criminal Injuries Compensation Scheme.
From next year, those affected by incidents abroad in the past ten years - such as the terrorist attacks in Sharm-el-Sheikh in 2005 and Mumbai in 2008 - could apply for retrospective financial support.
"I believe it is important that victims of terrorist attacks abroad should, in future, be able to qualify for compensation on a similar basis to victims of domestic terrorism," the justice secretary said.
"We are still imposing some limitations on claims but this is an enormous advance on a situation where previously nothing was being done."
Mr Clarke acknowledged the step had "taken some time" but said ministers had had to prioritise efforts to stabilise the compensation scheme which had an "enormous financial deficit".
Conservative MP Nick Boles said bereaved families could "never be compensated" for the loss of loved ones but the financial support would help survivors of terrorist attacks "try and rebuild their lives".
Mr Clarke also announced a clampdown on convicted criminals being able to claim compensation for injuries and psychological damage, saying it was "perverse" they were able to do so.
Over the past decade, 20,000 people with criminal records have been paid more than £75m, including a rapist and a person convicted of two killings, while more than 3,000 prisoners and ex-prisoners have made claims in the last year alone.
Under the current scheme, if a conviction is spent - it happened a considerable amount of time ago - or if a person was not jailed for more than 30 months, they can claim compensation.
In future, however, a person with a criminal record will only be able to claim compensation in exceptional circumstances.
This could include, for example, a minor offender who is very seriously injured or a criminal who prevents someone else being attacked.
Ministers say the cost of the compensation scheme has almost trebled since 1997 and the system needs to be made more "proportionate, speedy and effective".
In future payments will only go to the "most serious" cases with claims for minor injuries - such as broken toes and sprained ankles - ended.
The government wants to raise £50m for victims by asking perpetrators of crime to pay into the scheme through a "victim surcharge" of between £15 and £120, depending on the severity of the crime.
Currently, only criminals fined as part of their punishment are forced to pay a charge of a £15 flat rate.
Money would also be raised for victims' services by increasing fixed penalty notices for motoring offences, which have remained at the same level for 10 years, and through deductions from prisoners' pay from work in prison.
But Labour said the government's measures did not go far enough and a "victims' law" was needed to ensure the interests of victims were enshrined into law - rather than the "victim's code" that ministers propose.
"This government's policy on law and order is all over the place and the way it treats victims of crime is a prime example of this," shadow justice secretary Sadiq Khan said.
"We have a duty to support victims through all stages of the process and it is against this that this strategy will be judged. My fear is whether this government will be able to deliver the justice the victims in this country deserve."
One victim of crime who received compensation said the system needed "careful tinkering", not a complete overhaul.
"I would not want to see any victim of crime be unfairly refused an award if they undergo a violent crime which they suffer significant injuries from," Aleks Lukic told the BBC.
"In the end the real way to reduce the amount you spend under this scheme is to reduce crime."