The Government today launched a £5 million fund to fight Islamic extremism at the community level in a “battle for hearts and minds”.

Ruth Kelly, the Communities Secretary, said local authorities would bid for the money to back local initiatives aimed at halting the radicalisation of young Muslims.

The need to counter militancy was underlined last week by the arrest of nine suspects in anti-terror raids in Birmingham to foil an alleged “Iraq-style” kidnap and beheading plot.

Ms Kelly said: “As the events of the last week show, community tensions are high in some parts of Britain and the security threat remains serious.

"This new, more local approach will help reach directly into communities to support the law-abiding majority in tackling the false and pernicious ideology spread by extremists. In the past, Government has relied too much on traditional leadership organisations."

The move follows accusations from the Muslim Council of Britain in October that Ms Kelly had intimated in a speech that mainstream Muslim organisations – including the MCB – had been “half-hearted” in confronting extremists.

Local schemes backed by the new fund could include programmes to work with young people seen as vulnerable to extremist messages – those excluded from councils, schools and mosques, for example.

Khurshid Ahmed, chairman of the British Muslim Forum, said that the initiative could be effective in highlighting the value of smaller projects to local councils. But he added: “If it’s expected to deliver the whole agenda, it’s peanuts money.”

Mr Ahmed works with a Muslim youth group in Dudley. The Green Light Forum first met after three young men from nearby Tipton were released without charge in 2004 after two years' detention as terror suspects at Guantanamo Bay.

He said: “The group started with five young people – an imam and four others. Now there are 200 members. Most of them are attracted by the lectures which examine twisted extremist theology, then explain the mainstream interpretation.”

The group – touted as a model organisation by the Government – could be eligible for funding under the scheme. Until now, Mr Ahmed said, community projects have faced “tremendous barriers” and processes “riddled with red tape”.

This morning, police announced the release without charge of two of the nine British suspects of Pakistani origin arrested last Wednesday in Birmingham, prompting anger from Muslim groups.

Tanveer Choudhry, a Liberal Democrat councillor in Sparkhill, where three of the dawn raids were made, called the new fund “a pittance”. He said policymakers should work to cut deprivation and alienation, channelling extra money into local youth facilities, not just Muslim groups.

The so-called Preventing Violent Extremism Pathfinder Fund will be available to around 50 local authorities – mainly in Britain’s major cities – to work with local Muslim communities to devise new approaches to fight extremism.

Asked whether the fund could also be used to tackle non-Islamic extremism, a spokeswoman for Communities and Local Government said: “No. That threat is the main threat to the UK at the moment.”

Ms Kelly said: “We can’t win the battle of hearts and minds from Whitehall, it can only be to be won in local communities. But we can provide more support and strategic leadership.”

Yesterday, at a question-and-answer session with select committee chairmen, Tony Blair, the Prime Minister, said: “Winning hearts and minds is not just about reaching out to people. It is also sometimes about standing up to them and saying, ‘Your value system is a value system that is wrong’.”

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