Private and voluntary nurseries which agree to cap fees to parents at Pounds 175 a week will be able to apply for up to pound;16,000 to attract graduates and train staff.
The Government wants an early years-professional in every children's centre by 2010, and every full daycare centre by 2015.
The requirements for early-years professional status will be published in June. Existing teachers will be eligible to apply.
The cash will also be used to develop training routes, cover the costs of fees and supply cover for those training, enabling more early-years workers to be trained to level 3 (the equivalent of A-level).
Some staff will be trained to work with children who are disabled or have special needs.
Steve Alexander, chief executive of the Pre-school Learning Alliance, said:
"I am pleased that the fund will not simply be used to attract graduates as new entrants, but to support existing practitioners.
"It is crucial that, in the quest to raise qualification levels, we do not create a two-tier workforce where new entrants are seen as superior to existing practitioners, many of whom do not have the time or financial support to access training."
The Children's Workforce Development Council, which represents employers, has been told to look at how pay and conditions - including flexible working and holiday entitlement - affect staff turnover in all children's services by September 2006.
Former education secretary Estelle Morris, who is the council's chair, hailed the creation of a professional cadre in early years.
She said: "This strategy is a crucial step in creating a world-class workforce with the skills to improve the lives of our children, young people and families."
The early-years professional will be one of a number of new qualifications in the children's workforce.