Abu Dhabi is giving Bahrain a Dh9 billion grant to finance energy, housing, health and education projects.
Officials from the kingdom and the UAE signed a memorandum of understanding outlining the terms of the grant in Manama, the Bahraini capital, yesterday, reported the state news agency Wam.
The money will be managed by the Abu Dhabi Fund for Development (ADFD).
The initiative is part of the UAE's contribution to the GCC's development programme.
The Emirates is donating a quarter of the assistance to be given by Bahrain under the scheme, with Kuwait, Saudi Arabia and Qatar providing the rest.
The GCC funding was announced in March 2011, following weeks of political instability in Bahrain. Tensions are still running high and a teenager and a policeman were killed last week during protests.
At yesterday's signing, Mohammed Al Suwaidi, the acting director general of ADFD, said the assistance aimed to spur economic growth in Bahrain and raise living standards.
"The grant is significant for Bahrain as it will finance vital development projects," Mr Al Suwaidi said.
"[It] will aid the efforts to stimulate sustainable economic growth in Bahrain by helping the country carry out vital projects in energy, education, housing and more, attract more local and international investments, create new job opportunities, and raise the living standards of the Bahraini people."
Ahmed bin Mohammed Al Khalifa, Bahrain's minister of finance who signed on behalf of the country, thanked the UAE for its support.
"We extend our thanks and appreciation to the leadership of the UAE for its continuous support and its keenness to back the march of development in Bahrain," he said.
The state-owned Bahrain News Agency has reported that the money would be spent over a decade and about Dh900 million would be distributed annually.
ADFD has offered loans to Bahrain since 1974 to finance 10 large-scale projects with a total value of Dh1.06bn, in addition to grants worth Dh323.7 million.
In the past, Bahrain relied on loans from the UAE to carry out six projects aimed at improving power supplies, according to Wam.
Through two grants worth Dh176.3m, Abu Dhabi has also helped build housing in Bahrain.
The efforts include the construction of the first and second phase of Sheikh Zayed City, with 490 homes.
A Dh91.8m grant was given for a land reclamation project in the north of the kingdom, creating an area capable of accommodating 90,000 houses. The UAE has also provided a Dh60m loan to finance various small industrial units.
It also financed the reclamation work for a new port and industrial zone in Al Had at a cost of Dh367.3m.
With the latest grant, the value of loans and grants provided and managed by the ADFD on behalf of the Abu Dhabi government has risen to more than Dh10.5bn, Wam said.