The people of Wales will be given the opportunity to vote in a referendum to decide whether to take control of powers over income tax, David Cameron has said.
Speaking in Cardiff Bay with deputy Nick Clegg, Mr Cameron announced Wales would be given a new ability to borrow and control of stamp duty revenues.
Mr Cameron said the measures, part of a package to give more responsibility to the Welsh Assembly, were for "a strong Wales inside a strong United Kingdom".
Wales will take control of stamp duty paid by house buyers and landfill tax, bringing a "£200 million revenue stream", according to First Minister Carwyn Jones.
"Today we are announcing new powers for the Welsh people and the Welsh government," Mr Cameron told a packed press conference at the Senedd in Cardiff Bay.
"Power that is about building this country up. Power that's about ensuring what I want and what I know the Deputy Prime Minister wants and the First Minister wants, which is a strong Wales inside a strong United Kingdom."
The new package builds on the recommendations of the Silk Commission, which reported last November and recommended a series of tax and spending powers should be devolved.
Mr Cameron said borrowing powers would help the Welsh government finance improvements to the M4.
"This is like a foot on the windpipe of the Welsh Assembly," Mr Cameron said. "We want to encourage the Welsh Assembly government to take action as soon as possible."
The Welsh Government and Welsh people are to be given the opportunity for a referendum to be held on the devolution of income tax.
"We will be providing, through a Bill in the House of Commons, for a referendum so if the Welsh Assembly government and the Welsh Assembly want to hold a referendum on a devolution on part of income tax, i t will be their decision whether to trigger the referendum. If they do that it will be for the Welsh people to decide if they want these new powers."
Mr Cameron added: "We believe in a strong Wales within a strong United Kingdom. I think it will make for a better accountable government. I think it is good for a government to be responsible for raising some of the money it spends."
Mr Clegg added: "This is a milestone in the devolution of power to Wales and a big step forward.
"This package puts the Welsh people in the driving seat on jobs, transport, infrastructure and housing as well.
"The referendum on power in income tax is entirely a matter for the Welsh people.
"I am an advocate on further devolution with what I think has been a very centralised tax system in the UK as well."
The Prime Minister said certain parts of the Silk Commission, such as handing air passenger duty to Wales, would not be implemented.
"I think the problem with air passenger duty is it would have quite a distortionat e effect on the rest of the United Kingdom," he said.
Mr Cameron and Mr Clegg also announced that the Nato summit will be held in Wales in 2014.
"I was personally very keen to do this," Mr Cameron said. "I think these summits are a great opportunity to showcase different parts of the United Kingdom.
"Scotland has got the Commonwealth Games, London had the Olympics, Northern Ireland the G8, now it's Wales's turn.
"I think it is right for the UK to want to chair this conference at this time. We are coming to the end of this long Afghanistan mission.
"It will be a good moment to reflect on what Nato does next. It is the cornerstone of our defence."
Mr Cameron said 60 heads of state and government would attend the summit, which the UK last hosted in 1990.
Speaking after the announcement, Mr Jones said: "Today is an important day for Wales. It shows we are being treated as equal partners.
"The announcement that has been proposed is a substantial package. We are disappointed that air passenger duty for long-haul flights is not being devolved."
Mr Jones said new borrowing powers would enable Wales to consider new investments, including building an M4 relief road.
"We look forward to working with the UK Government to deliver on this package," Mr Jones said.
"It does show that it is possible for devolution to be flexible, that is a message that is important across the whole of the UK, not just in Wales."
He said the message of flexible devolution could "further strengthen the union of the United Kingdom".
But Mr Jones said the opportunity for a referendum on income tax powers was not something he was "in favour" of.
"We welcome the fact there will be a mechanism in place to devolve income tax in the future," he said.
"As a government, however, we are not persuaded with the devolution of income tax, certainly at this time.
"The finding basis for Wales must be solid first before we can consider whether income tax devolution can be appropriate for the people of Wales."
Mr Jones said landfill tax and stamp duty would bring in a "£200 million revenue stream" to Wales.
Finance minister Jane Hutt, speaking at a press conference with Mr Jones, welcomed the announcement.
"This is a step forward for a mature democracy," she said. "We are already making tough decisions, this is part of the armoury that we need as a government to make these decisions.
"This is excellent news for Wales, and a significant milestone in our story of devolution. It gives the National Assembly and the Welsh Government new responsibilities and significant opportunities to boost jobs and support the Welsh economy.
"These changes mean that, in the next few years, Wales will be in a position to tackle the improvements required for the M4, and to shape its own taxes, including the much needed reform of stamp duty land tax. A future Assembly will also be able to call a referendum on the devolution of rate-varying powers for income tax."
The announcement sparked fresh demands for more devolution to English regions amid warnings they risked becoming the "poor cousins" of Scotland and Wales.
Sir Merrick Cockell, chairman of the Local Government Association which represents councils in England and Wales, said the two countries now enjoyed an "unfair competitive advantage".
"Local government leaders in England will be thinking we want some of what they're having," he said.
"A lot of places in England have distinct economic and cultural identities as strong as those in Wales and a shift in power away from Whitehall would help them deliver more jobs, faster economic growth and better public services.
"This has huge implications for English communities on the borders of Wales, which now face the prospect of an unfair, two-speed tax regime and an uphill battle to retain and attract businesses and jobs.
"English regions are in danger of becoming the poor cousins in the Union as devolution hands Scotland and Wales an unfair competitive advantage.
"In taking steps to devolve more powers to Wales, the Government has clearly recognised the economic, administrative and cultural benefits of shifting power out of Whitehall and handing it to local communities. This is a policy which shouldn't stop at the borders but spread out across the UK."
Graham Allen, the Labour MP who chairs the Commons Political and Constitutional Reform Select Committee which has called for extra powers for English areas, said it was now " inevitable that devolution will come to England too".
"It is now just a matter of the form and timing," he said.
"People in England are just as capable of running their affairs and English local government presents a ready-made vehicle for English devolution and for income tax assignment
"No change in rates of income tax or equalisation or collection is required, but greater transparency and accountability of income tax assignment is the key to devolution.
"All parties should work together to agree how this is to be done and have the maturity to agree for their manifestos the next steps .
"The UK is just two steps away from a lasting democratic settlement that will enable the peoples of all the nations of the UK to value the Union and devolution equally.
"This will let all of us run our own affairs at the most appropriate level, and will be a clear and honest alternative to petty nationalism. Once England has devolution the role and responsibilities of the federal Parliament in Westminster will need to be carefully discussed and updated."