Business Secretary Greg Clark made the announcement at the Farnborough International Air Show.
The UK Space Agency deemed Scotland the best place in the UK to reach in-demand satellite orbits with vertically launched rockets.
The A'Mhoine Peninsula in the north coast of Scotland plans to host vertical launches as early as possible in the 2020s.
Leader of the Highland Council, Councillor Margaret Davidson, welcomed the news: "This is very exciting news for the region and offers a much needed opportunity for new high skilled jobs in Sutherland and Caithness. It has also has the potential to deliver wider economic benefits in terms of other associated industries, education and tourism. Obviously we will need to see the details of what is being proposed which will then be considered by the North Planning Committee in due course."
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The Government is also making available a new £2 million fund to boost further horizontal launch spaceport sites across Britain - such as Newquay, Glasgow Prestwick and Snowdonia.
Secretary of State for Scotland David Mundell commented: "The UK Government is driving the commercial space age and Scotland is leading the way. We are investing £2.5 million in a vertical launch site in Sutherland which will create hundreds of new jobs. And we will invest a further £2 million in horizontal launch sites - Prestwick is in the running for that and I wish them well.
"Scotland is uniquely positioned to pilot the UK's commercial space sector and the UK Government recognises this pot."
Graham Turnock, Chief Executive of the UK Space Agency, added: "This spaceport grant will help to kick-start an exciting new era for the UK space industry, and this is only the beginning of our LaunchUK campaign. We are committed to supporting a commercial market for access to space in the UK, and we will continue to engage with any company who seeks to operate here."
(CM/MH)
