The money is mainly earmarked for infrastructure, notably in the energy sector, as well as the promotion of economic and social development in the north of the divided island.

"I welcome today's decision that enables us to realize concrete projects bringing the Turkish Cypriot community closer to Europe," EU Enlargement Commissioner Olli Rehn said.

"It is another step by the EU towards putting an end to the isolation of this community and thus facilitating the reunification of Cyprus," he added.

Cyprus has been divided since 1974 when Turkish troops seized and occupied its northern third in response to an Athens-engineered coup to unite the island with Greece.

Though still divided, Cyprus became an EU member state in 2004. Only Turkey recognizes the statelet in the north of the island and Ankara's attitude to Cyprus is one of the sticking points to its own bid for EU accession.

EU stumbling block

After the entry of Cyprus into the European bloc, the EU committed to introducing measures to end the isolation of the northern part of the island and proposed aid of 259 million euros for the 2004-2006 period.

However, for almost two years the 25 EU member states were unable to endorse the proposal due to opposition from the internationally recognized Republic of Cyprus government, which finally gave the green light in February for a tranche of 139 million euros to be handed over.

The decision comes weeks after the EU's Finnish presidency proposed lifting the embargo on the Turkish Cypriots, allowing direct trade between Northern Cyprus and the EU, as planned in 2004 but never approved by the EU.

"I encourage the member states to take the next step and adopt our proposal from 2004 on direct trade between the EU and the Turkish Cypriot community," Rehn said.

Ankara insists on the lifting of the trade embargo as a condition to reopening its ports and airports to ships and planes from the Republic of Cyprus.

Several European officials have already warned that EU negotiations with Turkey, which began in October 2005, could be indefinitely suspended if it does not implement the so-called Ankara Protocol and open up its ports to Cypriot ships.

Cyprus solution

The German government has said Friday it sees a chance for a solution to the conflict with Turkey even before Germany takes over the EU presidency next year.

Günter Gloser, a high-ranking official in the foreign ministry, told Reuters that solving the trade dispute, a crucial topic in Turkey's EU accession negotiations, could provide the motivation needed for a compromise. He said chances were good for a breakthrough in the last two months of the current Finnish presidency, which expires at the end of the year.

"We all know there are some dramatics involved," he said. "But because it's clear how important this is for Turkey and the EU, we shouldn't speculate at the end of October that no solution will be found."

Gloser added that he hoped the Turkish government would not slow down on instituting the reforms the EU has made necessary before Turkey joins the European club.

European Commission President Jose Manuel Barroso, however, expressed concern on Thursday that Turkey's membership talks with the EU could be suspended since reforms have slowed to a worrying pace in the country.

Speaking to Italian daily Corriere della Sera, Barroso said, "I'm sorry to say this, but things are going badly."

"Reforms in Turkey are going forward very slowly, and I don't see the progress I would have expected," Barroso said. "We hope the Finns can help avoid a breaking off in negotiations but I really am very worried."