The money will be used to fund extra-curricular activities in primary and secondary schools, to buy instruments and to pay for choral and instrumental teaching.
A Youth Music Trust will be created to give young people a chance to develop their skills and to champion the cause of music.
It will raise private and public funding and will be chaired by Gavin Henderson, the principal of the Trinity College of Music in London. The other trustees include the Simply Red singer, Sir Elton, conductor Sir Simon Rattle, soprano Lesley Garrett and entertainer Richard Stilgoe.
The announcement comes almost two months after The TES's Music for the Millennium Campaign highlighted the threat to music teaching posed by Government plans to concentrate on the three Rs in primary schools.
The TES study found that one in five primary schools in England and Wales was cutting music teaching, with many schools dropping it altogether.
Mr Smith, who unveiled the scheme at St Saviour's and St Olave's School in Southwark, said the YMT would work with the Qualifications and Curriculum Authority, the Office for Standards in Education and other agencies to improve music teaching standards with better in-service training and an inspection framework for schools.
Mr Smith said: "The YMT will build on what David Blunkett is already doing to support music services." Last month, the Education Secretary promised to reverse the decline in school music, by setting local authorities minimum funding levels to ensure adequate provision.