The investment by Abu Dhabi's Sheikh Mansour bin Zayed al Nahyan, a member of the emirate's ruling family, will fund the project "through to commerciality" within two years.
When it is up and running, Virgin Galactic plans to start flying private passengers to space at a cost of $200,000 each. Branson's Virgin Group has invested more than $100m into Virgin Galactic since its launch in 2004.
Sheikh Mansour, who recently made about £1.5bn from buying and selling Barclays shares, is making the deal through his investment vehicle Aabar Investments.
The group also plans to invest a further $100m into the venture, in order to fund research into launching small satellites from unmanned rockets.
The news comes as Branson unveils the scheme's mothership -- WhiteKnightTwo -- at an air convention in the US. Testing of the craft is expected to commence later this year.
Some 300 people have so far paid $40m in deposits ($60m ticket sales) to guarantee an early seat. They include Professor Stephen Hawking and Formula One driver Rubens Barrichello.
Will Whitehorn, Branson's right hand man and president of Virgin Galactic, quoted in the Financial Times, said: "[The investment] completely funds the project through to commerciality.
"It gives us a kick start to get the satellite capability going and I think they will be a great partner.
"[Aabar] have got a strong ambition to invest in transportation and technology and Abu Dhabi has strong ambitions in developing science within the emirate. This project seemed to fit both criteria for them."
Aabar's investment has yet to gain regulatory approval. If it goes ahead, the company will gain rights to host space tourism and research projects if a spaceport were built in Abu Dhabi.
Khadem Al Qubaisi, chairman of Aabar, said: "Virgin Galactic is the leader in the realm of space tourism, having successfully established a potential global market for its offering in a very short span of time.
"Aabar's stake in Virgin Galactic will open a new avenue of opportunity for Abu Dhabi in this unique and dynamic business. The significant partnership not only falls in line with Abu Dhabi's larger plans to inculcate technology research and science at a grassroots level but also complements its aim to be the international tourism capital of the region."
Aabar is controlled by the International Petroleum Investment Company, which is owned by the Abu Dhabi government.