From 1 November, the direct long-haul rate of APD will fall to the lower short-haul rate - currently £12 per passenger in economy and £24 for business and first class passengers.
The decision means the future of Continental Airlines flights from Belfast International Airport to New York is now secured.
The airline has been making annual losses of around £5m over the last number of years because of high passenger tax on the route.
A £60 charge is currently added onto an economy ticket per passenger, with an additional £120 on a business ticket.
In comparison, the airline, which is also operating a flight to New York from Dublin, only pay €3 per passenger.
The Executive put pressure on Westminster, which has control over setting the charge, to save the Belfast route.
Local politicians said reducing the passenger duty paid on the flights could also help improve business links between NI and the US, and encourage investment opportunities.
Announcing the move, Mr Osborne said: "The Government has taken proactive measures to protect the only direct long-haul service operating from Northern Ireland and with it the jobs of those who serve the Belfast route.
Northern Ireland faces a unique challenge in attracting traffic - including very valuable business customers - into its airports.
Chancellor George Osborne
"By announcing this immediate cut and our intention to devolve aspects of APD, the UK Government is renewing its commitment to stimulating and rebalancing the Northern Ireland economy."
Mr Osborne also announced the launch of a process to devolve aspects of APD to the Northern Ireland Assembly, "as a recognition of its unique circumstances".
The scope of devolution is set to be agreed in cooperation with the Stormont Executive, HM Treasury said.
First Minister Peter Robinson and acting deputy First Minister John O'Dowd welcomed the announcement.
Mr Robinson said: "This announcement today will ensure that investing in Northern Ireland remains an attractive business option. We would also hope that as a result of devolution we will be able to secure flights to new long haul destinations.
"We anticipate that we will bring proposals to our Executive Colleagues that would further reduce this tax to at least the level in the Republic of Ireland as soon as it is devolved."
Mr O'Dowd said: "Many of our inward investment companies have expressly stated that their presence here was only possible on the basis good air links. By devolving APD we will be able to offer greater opportunities for more companies to invest here, guaranteeing the continued growth of our economy."
Enterprise Minister Arlene Foster said the announcement is "great news for the Northern Ireland economy".
"I am hopeful that the reduction in APD for long haul flights will encourage airlines to consider opening new routes to Northern Ireland," she said.
Finance Minister Sammy Wilson said he will discuss the arrangements for the devolution of the new powers with the Government "to bring it about as soon as possible".
Belfast International Airport Managing Director John Doran said: "This has been a challenging but ultimately rewarding path."
He said Mr Osborne's decision will help Northern Ireland gain fresh opportunities to develop other long-haul routes.
"We need to use the tools that have been provided to capitalise upon the opportunity, garner our resources and make it as easy as possible for visitors and investors to come to Northern Ireland," Mr Doran said.
"Today is an essential first step on that journey."
The Consumer Council has welcomed the news, but said further action is necessary to ensure the disadvantage NI domestic passengers face is removed altogether.