China's auto sector has been hit hard by waning consumer confidence, with growth in sales of passenger cars slowing to 7.3 per cent in 2008, the first year of single-digit growth in over a decade.
"To speed up the consolidation and revival of the auto industry, China must implement an active policy to boost consumption," the council said in a statement published on the central government's website.
The measures, which will run until the end of this year, will see sales tax for cars with engine capacities below 1.6 litres halved to five per cent.
The government will also give one-off cash rebates totalling $732m to owners of older vehicles who trade them in for newer, more fuel-efficient ones.
The government said it will set up a $1.4bn fund to promote new technology, including renewable energy, over the next three years, while supporting the eventual mass production of electric vehicles.
In addition to the short-term measures, the council said it aimed to enhance China's global competitiveness by encouraging brand development and establishing export-orientated production bases for vehicles and parts.
The government said it also planned to promote consolidation in the steel industry, which has seen a glut of capacity amid declining worldwide steel prices.