The Chancellor said an additional pounds 200m would be released this year and a further pounds 700m next year.
Commenting on the additional funds, the Deputy Prime Minister, John Prescott, said: "The resources released today will begin to redress years of under- investment in housing. Social housing, in particular, has been starved of new investment while assets were being sold."
The Local Government Association, representing local authorities in England and Wales, said the extra pounds 900m would fund the building of 28,000 new rented homes or repairs to 60,000 dwellings.
John Perry, director of policy at the Chartered Institute of Housing, said that though he welcomed the additional funds he was still looking for a commitment to release the full pounds 5bn made by local authorities selling council housing.
Jim Coulter, chief executive of the National Housing Federation, representing housing associations and other social housing bodies, said: "It's a good start but needs to be followed by a faster release after 1998/99 as economic capacity expands."
Councils will not be able to use the set-aside funds directly,but can use them as collateral when borrowing to finance new building work.
Estimates suggest that if the full pounds 5bn was spent during the lifetime of this Parliament the Government could build 70,000 council homes and create 13,000 jobs for every pounds 1bn invested.
The measures will require the redistribution of council house proceeds from relatively affluent boroughs such as Bromley in Kent to inner city areas in Birmingham and Newcastle which have the greatest need for new social housing.
Yesterday's announcements were part of the Local Government Finance Bill. Under the 1989 Local Government and Housing Act, local authorities have been required to set aside 75 per cent of receipts from the sale of housing assets such as council houses.