Pre-school services have lagged behind the rest of the UK and expansion has been halted by successive education ministers, who have said that priority must be given to older children.
Michael Ancram, the current minister, conceded last year that almost half of four-year-olds have no state pre-school place. Only one in 10 three-year-olds is at nursery school.
In the first initiative since the 1970s, the department is consulting school providers about the criteria to be used for selecting new nursery projects. These might benefit from EU funds of Pounds 255 million over three years for Northern Ireland.
But some education and library boards are dismayed at the main criterion proposed by the Department - that a primary school should be considered for a nursery unit only if at least half the pupils are eligible for free meals.
Even supporters of the proposed expansion fear that this would exclude almost every controlled (Protestant) school in Northern Ireland and that the peace and reconciliation fund could be seen as a one-sided venture to help Catholics.
They want a more careful study of how the commitment to targeting social need can be combined with community projects which bring children together. At present, there is a lot of religious integration in nursery schools, although most are in the controlled sector.
The initiative is also being seen as an effort by the department to regain ground it has lost to the social services department, which aims to introduce pre-school vouchers worth Pounds 1,100 per child next year.
It is estimated the scheme will give Northern Ireland parents a notional Pounds 3.3 million to spend, much of which could be channelled back to the education service by redeeming the vouchers. If the EU pays for buildings, and vouchers meet most of the recurrent expenditure, the cost to the department could be small.
The Government is also trying to ease the strict standards applied to nursery buildings.
A further complication is that several boards have put in bids for the EU fund, which they will not want overturned by the department.