Prime Minister Anthony Albanese announced a scaled-back extension of the fuel excise reduction, meaning petrol and diesel will be 16 cents per litre cheaper in July than they would be without the discount.
The current saving at the bowser is 32 cents per litre, brought into effect three months earlier in response to the conflict in the Middle East, which sent global oil prices surging due to the de facto closure of key shipping channel the Strait of Hormuz.
The full discount will end after June 30, having cost the federal budget an estimated $2.9 billion in lost revenue.
Mr Albanese said gradually scaling back fuel relief was the sensible thing to do.
"We know that families are still under pressure and we also know that the impact of this conflict on the other side of the world will have a long economic tail to it," he told Sky News on Sunday.
"There's still some uncertainty that oil prices come down this week. We want to see that flow through, but it will take some time."
The prime minister said he would meet with state and territory leaders on Monday to discuss the continued waiving of potential windfall GST gains from higher fuel prices.
Under an existing agreement, the jurisdictions have agreed to forgo the extra revenue to put additional downward pressure on prices at the bowser.
"I'm confident that the states will, just as they did the right thing beforehand, step down accordingly," Mr Albanese said.
Opposition Leader Angus Taylor said the coalition would consider Labor's plan, adding it had been supportive of the excise cuts from the start.
But his frontbench colleague Ted O'Brien went further, hailing the government's decision as a "credit to them".
"It's a practical step. It's good insurance," he told ABC's Insiders program on Sunday.
"The real test for them is whether or not they find budget offsets to pay for it."
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said extending the support would provide short-term certainty for freight operators and businesses.
"The government should remain ready to respond if conditions deteriorate," he said.
"Stability in fuel supply and pricing is critical to keeping goods moving and keeping costs under control."
The heavy vehicle road user charge was suspended until the end of June under the initial agreement to reduce freight costs.
It will be halved to 16 cents per litre of diesel for July under the extension.
The reduced excise and road user charge are expected to cost the budget $400 million in forgone revenue for the month.
The announcement coincided with a brief reopening of the Strait of Hormuz amid a fragile agreement between the United States and Iran to cease hostilities.
Iran has since claimed to have closed the passageway again in response to Israeli strikes on Lebanon.
Australia currently has 44 days' worth of petrol in reserve, or about eight days more than when the US first bombed Iran in late February.
Diesel stocks are running at 39 days and jet fuel at 32 days.
The government confirmed on Saturday the second week of June marked the highest level of fuel held in Australia since the minimum stock obligation came into force in 2023.
According to the Australian Competition and Consumer Commission, average capital city bowser prices for petrol are hovering between $1.65 and $1.92 per litre.
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