The initiative, which will see murals and emblems replaced by colourful community art, was announced by NIO Ministers David Hanson and Maria Eagle and is open to communities of all political hues across Northern Ireland.
The Re-Imaging Communities Programme is one of 62 actions included in the Government's Renewing Communities Action Plan, which is targeting deprived working-class areas throughout the Province.
Although misunderstood yesterday in some quarters as a funding measure only for loyalist communities, a Government spokesman clarified that £2.3m of the money was available to all communities, while £1m of the budget was originally launched as part of the Renewing Communities package for loyalist areas, announced in April.
"Renewing Communities sets a challenging agenda for change for all of us," said Mr Hanson at the Crescent Arts Centre in Belfast.
"We want to improve life prospects, build community capacity, improve public service and, ultimately, to free communities from paramilitary influence."
Building on the previous work of the Arts Council's Art of Regeneration programme, the scheme will fund community-led projects to the tune of £5,000 for small undertakings and up to £50,000 for larger schemes.
"The purpose of the Re-Imaging Communities Programme will be to engage local people and their communities in finding ways of replacing divisive murals and emblems with more positive imagery," said Ms Eagle.
"New murals and public art will transform parks, housing estates and built-up areas across Northern Ireland, celebrating the aspirations of the whole community and helping people feel part of their own local community."
The Arts Council also revealed yesterday that it had £200,000 of Government money to grant over two years for art project applications from groups which had ethical objections to using lottery money.
A source in the Department of Social Development yesterday said that there were no plans to expand non-lottery granting sources but that the Arts Council was the only group so far to make the proposal.
However, SDLP North Belfast MLA Alban Maginness claimed it was impossible to justify the allocation of the funds.
He said: "Many people will fear that this is nothing more than a polite form of extortion.
"The people causing the problem will now be paid to stop causing it."