London, Birmingham and Manchester will be asked to produce their 'visions' for the future, combining local authorities, businesses, and voluntary groups.
A new Cabinet committee, EDR, chaired by Tony Newton, the Leader of the Commons, will co-ordinate government policy on the regional grants, by merging 20 programmes for regeneration and economic development into a budget of about pounds 1.4bn.
Regional offices for four Whitehall departments, Transport, Trade and Industry, Employment and Environment, will be merged, and the budget will include Home Office money for the inner cities.
John Gummer, the Secretary of State for Environment, strongly denied the new system would divert aid from inner city areas with high numbers of people from ethnic minorities to the Tory constituencies on the south coast, which have been given assisted area status.
One ministerial source said a claim that the new system would mean Tower Hamlets would lose money to Tory Hastings was 'plain wrong'. Changes to the criteria may put less stress over the long term on ethnic population, although it will remain a factor in assessing needs.
It is also likely to herald the end of Michael Heseltine's project for inner city regeneration, City Challenge, under which councils bid in competition for funds. That principle is now being adapted to regeneration across the country.
'The budget will mean that priorities are set locally, in the light of local needs, not in Whitehall,' Mr Gummer said.
He told Peter Shore, the Labour MP for Tower Hamlets in east London, that a lack of resources was not the cause of the rise of racism there, leading to the election of a BNP councillor in the area.
He denied a claim by Jack Straw, Labour's local government spokesman, that the system amounted to regional government without democratic control. But officials confirmed it would be used to help attract regional aid from the European Union.