A study carried out as part of the European Space Agency's 'New European Launch Service' backed the plans; paving the way for it to blast off in 2019.
The engine called Sabre, stands for Synergetic Air-Breathing Rocket Engine, and was built by British firm Reaction Engines.
Reaction Engines claims Sabre can be used to help accelerate existing aircraft up to five times the speed of sound and plans to use the technology on a unique 3,500mph 'spaceplane' called Skylon. It is currently believed that the firm is putting the finishing touches to the plan to launch the aircraft - possibly in 2019.
It has been assigned as a 'high priority' technology project by the UK government following the favorable technical reports from ESA's propulsion experts.
The aircraft will be able to fly Mach 5, five times the speed of sound, because of the engine, Sabre.
Modern-day traditional aviation engines have to carry tanks of liquid oxygen when traveling at more than 1,900mph because they can't 'breathe' oxygen.
Oxygen helps an engine to burn the fuel needed to power its propulsion.
Reaction Engines Sabre design uses a system of pipes, filled with helium.
The air passes through these pipes and the helium helps remove any heat and the oxygen is carried to the engine.
Once in space, the engine is capable of switching into rocket mode. This means the craft can travel in orbit for around 36 hours and used to launch satellites, for example.
David Willetts, minister for universities and science, said the investment in Sabre would provide support at a 'crucial stage' to allow a full-scale prototype to be built.
A passenger version, called the Lapcat A2, is also under development.
Skylon is likely to be viewed a competitor to Sir Richard Branson's Virgin Galactic business, in which people can experience six minutes of weightlessness during a sub-orbital spaceflights.