The new funds will help vulnerable families in the capital, alongside a public consultation, also announced today, on raising outdated statutory overcrowding standards which haven't changed for 70 years.
£20 million will be targeted at helping councils tackle overcrowding, with schemes to carry out loft extensions or provide support for single people who want to move out of family homes.
Commenting on the£20 million to help tackle overcrowding, Association of London Government Chairman Merrick Cockell said: 'This money represents a significant boost to the thousands of families living in overcrowded conditions in the capital. Far too many families in London live in cramped conditions, which has a huge impact on their health and wellbeing.
'We are pleased that the government has accepted the recommendations in the ALG's 10-point action plan to tackle overcrowding in London, in particular the proposals to allocate more funding for home extensions to allow families to enlarge their homes.
'At the same time the plan to provide support for single people to move out will alleviate much of the pressures facing those in overcrowded family homes.
'While we welcome these interim steps, in the long run we need far more homes to be built with four bedrooms or more if overcrowding is to be seriously reduced.'
The overcrowding standard hasn't changed since 1935. This means that a family of four, including a teenage girl and a teenage boy in a one bedroom flat, would still not be classed as overcrowded under current standards. The result in some circumstances can be babies sleeping in kitchens, the DCLG said.
Some local councils will not give overcrowded families priority for relocation until they breach statutory standards. The government is consulting on options for raising standards and building them into allocation policies.
Speaking at a Shelter conference this week, Yvette Cooper said: 'It is now 40 years since Cathy Come Home exposed all that was wrong with the welfare system. Since then, we have made great progress with higher standards of protection which would ensure her experiences would not be repeated today. But overcrowding standards were out of date even in Cathy's day. And they are truly shocking today.
'Demand for housing in London is high. The only answer in the long term to address overcrowding is to build more homes, including bigger family homes. But in the meantime we can do more for families who are in desperate housing need today.'
Earlier this year, Ms Cooper announced that the proportion of new social housing of three or more bedrooms to be built in London will be increased from 27% to 34% over the next two years of the affordable housing programme.
Ms Cooper today also announced that 12 local authorities and one housing association have been selected as homelessness 'regional champions' for 2006/07. There is at least one champion in each region and they will work with other local authorities to provide support and share good practice to prevent homelessness.
'Tackling Overcrowding in England - A discussion paper' can be read here.