A new #5 million fund to help town halls lead the fight against Muslim extremism has been unveiled in the wake of terror arrests in Birmingham.

Launching the scheme, Local Government Secretary Ruth Kelly said: "As the events of the last week show, the battle for hearts and minds is more important than ever."

The initiative was welcomed by MP Khalid Mahmood (Lab Perry Barr), but he warned: "We need to involve the whole community, not just Muslims."

The money should be used to help different sections of the community work together, he said.

Ministers have identified about 50 local authorities which they hope will take part, including Birmingham, Sandwell, Coventry, Solihull, Walsall, Wolverhampton, Dudley, Stoke and Telford.

They will be encouraged to run initiatives which could include working with young Muslims excluded from school, who it is thought could be attracted to extremist messages.

Councils were also urged to support local community leaders who oppose extremism, and to offer advice to mosques and madrassahs.

They could run programmes to help faith schools develop links with schools of different religions, and run volunteer programmes for young Muslims.

Ms Kelly appeared to confirm reports that Ministers are disappointed with the leadership shown by high-profile organisations such as the Muslim Council of Britain, which were courted by Tony Blair following 9/11 in the US.

She said: "In the past, Government has relied too much on engagement with traditional leadership organisations."

She added: "There are many people in Muslim communities who are already taking a brave stand and doing incredible work.

"It’s important we do more to support them specifically through local authorities and organisations who know their communities best.

"This new, more local approach will help reach directly into communities to support the law-abiding majority of Muslims in tackling the false and pernicious ideology spread by extremists."

The initiative is part of a wider Government effort to prevent a repeat of the July 7, 2005, attacks in London, when 52 commuters died in suicide bombings during the morning rush hour.

Over the next few months, Ms Kelly will also meet former extremists who were persuaded by such community efforts to return to the mainstream.

Earlier this week, Tony Blair made clear his determination to "stand up" to Islamist extremism at home and abroad in what he said would be a "generational struggle".

Mr Mahmood said: "The money will be useful if it is used across communities, to allow them to work together.

"It should not be an isolated thing just for the Muslim community."

City councillor Salma Yaqoob (Respect Sparkbrook) said: "Anything that helps alienated young people is useful and positive."

However, she said Government also needed to consider the reasons young Muslims felt alienated, which she said included a feeling that they were being demonised and British foreign policy.