Southern Railway has been ordered to pay for a £13.4 million package of improvements after Transport Secretary Chris Grayling decided that industrial action does not fully explain the operator's poor performance.
It came as the firm's train drivers announced fresh strikes in a dispute over pay.
Members of trade union Aslef will walk out on August 1, 2 and 4 after a vote found that 62% were prepared to take part in a strike. Turnout was 81%.
Southern has been involved in a bitter row with unions over proposals for so-called driver-only operated trains, with conductors holding several strikes in the past year, while drivers have separately walked out over the issue.
But services have also been impacted by extensive railway improvement works, with Southern's parent company Govia Thameslink Railway (GTR) admitting it had "underestimated" the impact of this.
Following the start of industrial action in April last year, GTR lodged a claim for force majeure, arguing that poor performance was due to strikes and high levels of staff sickness.
But Mr Grayling concluded that "this does not fully explain the poor service that passengers received".
Mr Grayling said passengers have been "badly let down" and he described the industrial action as "totally unjustified", adding that it "must stop now".
He went on: "GTR must also do better in providing services to its passengers. When trains are cancelled unnecessarily, it can cause huge disruption. And when trains are shorter than they ought to be, it can leave already busy services unbearably overcrowded."
The £13.4 million fund will be used as follows:
:: £7 million for the Department for Transport (DfT) to allocate to schemes that will directly benefit passengers.
:: £4 million to fund 50 on-board supervisors over the next two years from January 2018.
:: £2.4 million to help performance improvements.
Mr Grayling was required by a court ruling to announce his decision on the force majeure claim by Thursday.
The High Court made the ruling after hearing an application by the Association of British Commuters for a judicial review into the way the minister has dealt with Southern.
GTR chief executive Charles Horton said: "We are pleased that this issue has been concluded, and accept and are sorry that our service levels haven't been good enough for passengers."
In the past 12 months less than three-quarters (74%) of Southern mainline and coast services met the industry punctuality target of arriving at their terminating station within five minutes for commuter services and 10 minutes for long-distance journeys.
Southern's metro services performed only slightly better at 78%.
The average score for all operators across Britain was 88%.
Go-Ahead, which owns GTR in a joint venture with French firm Keolis, said the £13.4 million settlement, which will impact its rail arm profits, was "very close" to expectations.
But it said annual rail profits could still be hit by up to another £5 million due to ongoing talks with the DfT over contract changes, such as a timetable overhaul.
London mayor Sadiq Khan said the payment will be "absolutely no consolation for hard-pressed commuters who have been forced to suffer a litany of appalling service and spiralling fares".
Lianna Etkind, of the Campaign for Better Transport, described the money being spent by GTR as "too little, too late".
The funding package is also unlikely to soothe trade union anger, with members of the Rail, Maritime and Transport (RMT) union last week staging their 33rd day of action in a row over plans to change staffing on trains.
RMT general secretary Mick Cash said: "This pathetic response to the abject failure by Southern/GTR to deliver on their contract doesn't even stack up to a slap on the wrist. No wonder the company are gloating. Chris Grayling has let them off the hook big style."
In relation to the pay dispute, Aslef general secretary Mick Whelan urged Mr Grayling and the DfT to step in and "assist in finding a resolution to a problem they caused".
A GTR spokesman said: "To call three days of strikes spread across a week is a deliberate move to cause maximum disruption for passengers.
"To do so in protest against an offer to increase pay by 24% is simply breathtaking. Commuters, the vast majority of whom are seeing pay rises many times less, will understandably be as shocked and frustrated as we are."