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."
A recent report for the Government by rail executive Chris Gibb largely blamed the unions for the disruption.
The £13.4 million fund will be used towards funding 50 on-board supervisors, schemes that will directly benefit passengers and measures to boost service performance.
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.
The funding package failed to soothe trade union anger.
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."
London mayor Sadiq Khan said the payment will be no consolation for commuters suffering "appalling service and spiralling fares" while the Campaign for Better Transport claimed it is "too little, too late".
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".
GTR described the latest drivers' strike as "a deliberate move to cause maximum disruption for passengers", adding: "To (strike) in protest against an offer to increase pay by 24% is simply breathtaking".
A DfT spokeswoman said Southern's performance has been "significantly better" since the start of the year, but this can only improve if industrial action stops.
She continued: "This action is completely unnecessary, particularly considering the generous pay offer from GTR, that would have seen driver salaries rise to over £60,600 for a 35-hour week.
"Aslef members on Thameslink are at work, having accepted a similar pay deal, making this strike action on Southern all the more unreasonable."