Only shops with less than 3,000 square feet – essentially convenience stores and small independent shops – can open for more than six hours.
Under the plans to be announced in the Budget, Sunday trading hours will become a devolved issue, meaning that mayors and local councils will be able to decide how long shops can open for.
The Treasury believes that extending Sunday trading could create thousands of jobs and generate hundreds of millions of pounds a year in extra income for shops around the country.
The new measures will be taken forward in the Government’s new Enterprise Bill in the autumn, the Treasury said.
Until 1994, only specialist outlets such as garden centres, corner shops or chemists were allowed to trade on a Sunday.
An attempt by Margaret Thatcher’s Government to allow shopping on Sundays was in 1986 defeated by Tory MPs who saw it as a threat to family life and church attendance.
The Church of England has made clear its opposition to a change in Sunday trading rules.
Opponents have warned that a relaxation of the rules would hit already-dwindling church attendances.
“Even two decades on from the introduction of the Sunday Trading Act, it is clear that that there is still a growing appetite for shopping on a Sunday,” Mr Osborne said. “There is some evidence that transactions for Sunday shopping are actually growing faster than those for Saturday.
“The rise of online shopping, which people can do round the clock, also means more retailers want to be able to compete by opening for longer at the weekend. But this won’t be right for every area, so I want to devolve the power to make this decision to mayors and local authorities.
“This will be another part of my plan to ensure a truly national recovery, with our great towns and cities able to determine their own futures.”
Reforming Sunday trading rules would bring the UK in line with its international competitors.
Paris has recently relaxed restrictions on Sunday trading, while there are none at all in New York.
A number of polls have found that after more than 20 years of restricted trading consumers want the laws to be relaxed.
Sunday trading rules were relaxed in the UK during the 2012 Olympics, resulting in a significant surge in sales.
However, Britain’s biggest retailers are divided over whether to extend trading hours on a Sunday.
Asda and Morrisons have previously pressed for the Government to change the law, but Tesco, Sainsbury’s and John Lewis support the current rules.
Tesco, Britain’s biggest retailer, last year said: “Whilst we recognise the benefits on a limited basis, such as the Olympics in 2012, we are mindful of the impact this would have on our colleagues. We do not have any plans to change our current position.”
However, Asda said: “Our customers’ shopping habits have changed significantly in recent years with convenience ranking high, alongside value. Retailers need to adapt to meet the needs of customers, which is why we support a review of Sunday trading laws.”
Morrisons urged the Government to “listen to customers”. It said: “Increasingly they want to shop at different times and sometimes they want retailers to open earlier and stay open later.”
Research has found that extending Sunday trading by two hours in London alone would create nearly 3,000 jobs, and generate over £200 million a year in extra income.