Local authorities across England will receive a total of £100m to share among early years providers.
Existing settings will be able to use the funding to expand their premises to increase capacity for two-year-old places in poorer areas.
Money will also be available to support new nurseries and childminders to set up their businesses so that they can offer free places to two-year-olds.
Nurseries and childminders have been sceptical about the extent to which they would be able to offer two-year-old places without extra funding to help them expand their businesses. There have been concerns in the sector that only large nursery groups would have sufficient capital investment to take part in the scheme.
A survey by the Pre-School Learning Alliance in June found that out of 1,000 nurseries only one in eight believed that they would receive sufficient funding to cover the costs of providing extra places for disadvantaged two-year-olds. In the same survey only 21 per cent of providers said they would invest their own capital in expanding provision to offer two-year-old places.
The Government said that children from disadvantaged backgrounds are known to be more at risk of poor development, with evidence showing that differences by social background emerge early on in life.
Ministers say that high-quality early education can make a difference to a child’s progress and the extra funding will help to make sure children from poorer families do not lose out.
The two-year-old offer will be extended to 130,000 more two-year-olds from September 2013, rising to 260,000 (40 per cent of all two-year-olds) in September 2014.
The deputy prime minister will say, ‘Every child should have a fair chance from the word go. High quality early education can make a huge difference to children at the start of their lives. By getting things right from the off, they are much more likely to be ready to learn when they start school and to get the most out of their lives.
‘It’s important we put the support in place to ensure nurseries and other childcare providers can supply thousands of additional free places, so that children can reap the benefits.’
From this month ten pilot areas are trialling the two year-old-places. They are on offer in Blackpool, Cornwall, Greenwich, Kent, Lambeth, Lancashire, Newcastle, Northamptonshire, Peterborough and Rotherham.
Commenting on the announcement, Anand Shukla, chief executive of the Daycare Trust, said, 'The Government has listened to concerns raised by local authorities and childcare providers that the funding available was not sufficient to make the necessary capital investment, both to expand provision among existing nurseries or childminders and to support new ones to enter the market.
'It is a tall order for local authorities to provide enough places for all eligible children, and ensure that parents can be confident that the provision is high quality and suitable for very young children, and this extra funding will help them meet that challenge.'