The Israeli cabinet has backed a $214m investment plan for Israeli Arabs, who have long suffered inequality and a history of discrimination, BBC reported.
Israeli-Arab groups gave the news a cautious welcome but said some of the money just made up for cuts last year.
About 20% of Israel's population are people of Arab descent who remained in Israel after its creation in 1948.
Israel is under pressure to tackle wealth gaps between communities as it seeks to join the OECD later this year.
"Underlying this plan is a dramatic change of direction in the government's policy," said Israeli Minister for Minorities, Avishai Braverman.
The plan commits 800m Israeli shekels ($214m) over five years to the areas of economic infrastructure, housing and transportation in 12 localities, together with an initiative to reduce violence within the communities.
Municipal services in many Israeli-Arab communities are inferior to those in Jewish areas, with classrooms shortages, ageing roads and a lack of local employment opportunities.
Prime Minister Benjamin Netanyahu said the Israeli Arab population's "potential is not being realized" and the economic growth and equality that would result from the plan would "stand to transform the face of Israeli society".
Israeli officials said the plan would boost economic growth nationally by raising employment rates among Israeli Arabs, particularly among women.
The plan does not, however, tackle education, which is an area where Israeli Arabs frequently say there is discrimination.
Jafar Farah of the Mossawa Center, which advocates for the rights of Israeli Arabs, said the announcement was the result of "years of campaigns".
But, he said: "We have long experience that shows that most governmental decisions [to improve the situation for Israeli Arabs] - and even legislation - haven't been implemented."
Mossawa said budget cuts last year reduced Arab councils' funding by 250m Israeli shekels ($67m). Mr Farah said the new plan was essentially "giving back the funds that have been cut".
Israel is on track to join the group of rich countries, the Organisation for Economic Cooperation and Development, following assessments of its economic performance.
However, the organisation has said Israel should make progress on the wealth gap between mainstream society and two groups - Israeli Arabs and ultra-orthodox Jews.
Some 50% of Israeli Arabs live in poverty, as do 60% of ultra-orthodox Jews, compared to 20% of all Israelis - which itself is significantly higher than the OECD average of 11%.