For the first time, lottery cash will be used to pay teachers' salaries as well as funding after-school clubs and the purchase of musical instruments.
Until now the lottery has not been used to pay the salaries of people working in the public sector. But new legislation now makes this possible.
In the Government's continuing determination to harness glitzy showbiz names to its policies, Mr Smith has set up a Youth Music Trust whose trustees will include the rock musicians Sir Elton John and Mick Hucknall, the conductor Sir Simon Rattle, the opera singer Leslie Garrett and the entertainer Richard Stilgoe. The trust will be chaired by Gavin Henderson, the principal of Trinity College of Music in London.
Mr Smith said yesterday he "sincerely hoped" that Sir Elton John and other members of the trust would give masterclasses in schools. They will have to make decisions on which schools and local authorities will be awarded money for musical instrument tuition as the lottery applications come in.
Mr Smith set up the trust after being dismayed by the decline of musical instrument teaching in schools. He said yesterday that there could be future lottery funds for art, sport and drama projects in schools, most particularly for theatre and education.
The music fund will focus on after-school clubs and other extracurricular activities at both primary and secondary level up to the age of 14. But it will also include timetabled lessons and pay for peripatetic music teachers. Lessons will include singing as well as classical, pop and ethnic minority music.
Asked about the use of lottery money for what has traditionally been seen as normal education expenditure, Mr Smith said: "We have to take things as they stand. People might argue that renovating a Royal Opera House would once have been done under normal funding.
"This trust is doing a lot more than just going down the traditional educational route. It will be after-school clubs and many extracurricular activities. And I will be working alongside education secretary David Blunkett."
At present, musical instrument tuition is not compulsory in schools, though musical appreciation is. "There has been a decline in musical instrument teaching, and provision is very patchy with some boroughs such as Southwark providing none at all," Mr Smith said. "In many parts of the country, if your parents don't have very much money it's very difficult to get access to musical instrument tuition.
"My long-term aim is to ensure that any young person anywhere in the country who wants to play a musical instrument will have the opportunity to do so."