Lord Mandelson told the conference the scheme would be extended into 2010, to fund an extra 100,000 cars and vans.
The business secretary toyed with the audience of Labour delegates, at first saying: 'The money is running out.
'I'm sorry we cannot do everything – but this does not mean doing nothing.'
Before adding: 'So today, I am extending our popular car scrappage scheme with extra money for an additional 100,000 cars and vans.'
The scheme, which was announced in this year's Budget by chancellor Alistair Darling, sees motorists being given a £2,000 'helping hand' towards the purchase of a new car, if they trade in their current vehicle if it over ten years old.
Since the scrappage was brought in 227,750 orders for new vehicles have been placed.
Manufacturers have initially welcomed the news to help the beleaguered British motor industry. Michael Cole, managing director of Kia Motors (UK) Ltd., said: 'Kia welcomes this extension.
'With VAT expected to rise from the current rate of 15 per cent, an extension to the scrappage scheme will help to soften the blow to automotive business in the UK and help maintain momentum across the motor industry.
'It will also keep footfall high in dealerships across the UK, hopefully protecting jobs and dealers.'
Lord Mandelson also said help would be given to those in the trade who faced unemployment, on the back of announcements made by Vauxhall and Jaguar to close factories in the UK, saying the government would 'stand behind' Vauxhall workers at Ellesmere Port and Luton.
In a statement released by the government, Lord Mandelson said: 'The [motor] sector has been strongly affected by the recession, but the scrappage scheme has delivered a boost to manufacturers and the supply chain. We have listened to the concerns of manufacturers and are increasing the funding of the scheme to £400 million.
'But we must make sure that the help we do offer is targeted, limited and proportionate. This is not a blank cheque to the auto manufacturers but recognition that there is still a short-term challenge to boost demand and confidence in the sector.'
Society of Motor Manufacturers and Traders (SMMT) chief executive Paul Everitt added: 'Lord Mandelson's announcement of an extension to the car scrappage scheme is an extremely important decision that will inspire consumer and business confidence. It will help to stimulate demand, giving more consumers access to it, and create a bridge to a period when economic growth is strengthened and more sustainable.
'The additional 100,000 vehicles should help to counter the likely negative impacts of a return to the higher rate of VAT and the introduction of first year Vehicle Excise Duty rates.'
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