The government is to fund the first stage of a new conflict transformation initiative in loyalist areas, NI Secretary Peter Hain has announced.
The project was proposed by the Ulster Political Research Group (UPRG), which advises the illegal paramilitary Ulster Defence Association.
The initial stage of the project will last up to six months, and the £135,000 fund will employ project workers.
The SDLP said it would be closely monitoring how the money is spent.
Mr Hain said: "Setting communities free from criminality and the influence of paramilitaries will not just happen of its own accord or overnight.
"It needs to be worked for and those who have shown that they are committed to doing that, and have ideas about how it can be done, deserve support.
"That is why I have authorised this funding."
The secretary of state said he understood victims of loyalist violence may feel angry and bitter about his decision, but said it was his responsibility to encourage those who wanted "to turn their back on loyalism's murderous past".
The funding will be administered by Farset Community Enterprises, an organisation based in north-west Belfast.
Staff will work with community representatives and key stakeholders in loyalist areas to develop ways of ending the influence of paramilitaries and criminality.
Irish Foreign Minister Dermot Ahern said he hoped the initiative would be "a further step along the road to definitive transformation".
"There are many within loyalism who want to break from the past – it is right that those who are genuinely engaged in efforts to move their organisations away from paramilitary activity and criminality should be supported in that work," he said.
The UPRG said it welcomed the announcement, which it said "recognises the need for a process involving loyalism and will assist them in working with other agencies, community groups and public bodies".
"The project would help loyalism "define the need for all to continue to examine ways of assisting loyalist paramilitaries to move beyond conflict and assist them in their search for an inclusive peace, which is sustainable and enduring".
SDLP assembly member Alban Maginness said although it was right to fund disadvantaged areas, he was opposed to any reward for people involved in crime.
"It is important that this money is used for the right reasons and over the course of this six-month project, the SDLP will be monitoring how it is used to better the lives of people living in deprived areas," he said.
Sinn Fein's equality spokeswoman Caitriona Ruane said she was concerned the NIO was investing "public money into certain loyalist communities at the expense of other areas where greater levels of actual need exist".
"If people are to have confidence in the administration of public money, then it is vital that the process of allocating such funds is transparent and driven by economic and social realities, not the whims of political expediency within the NIO system."
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