The government is to grant nine pilot councils radical spending freedoms.
The announcement is the first tangible concession to emerge from the Office of the Deputy Prime Minister's ongoing bid to develop a 10-year vision across government on the role of councils*.
Deputy prime minister John Prescott admitted there was 'apprehension' within other government departments over the plan.
'That is why we have got pilots, to learn from mistakes,' he said. 'We have to proceed slowly so we don't compromise our targets and what we are supposed to deliver.'
Local government minister Nick Raynsford said: 'We all have concerns. Colleagues want to see their objectives
Pilot councils will be expected to work with their partners and central government to set targets within the local area agreement, but will have the freedom to determine how the targets should be achieved in order to best reflect local priorities.
Eight of the nine councils will see the current myriad funding streams for area-based initiatives, which would typically account for a tenth of their budget, reduced to three individually negotiated blocks. These are: children and young people; safer and stronger communities; and health and older people.
The ninth will have even greater discretion, receiving a single funding pot to spend as it and partners see fit on delivering the priorities agreed across the three blocks.
Mr Prescott described the current complexity of non-mainstream funding as 'a bit crazy' - one small council could receive 42 funding streams from six government departments. As well as simplifying channels of funding, the agreements would provide an 'intelligent and mature' conversation between central and local government, he said.
One council in each government office region will be chosen for the pilot, with the final selection to be made in the autumn. Mr Raynsford indicated the experiment would not be limited to councils ranked as 'excellent' under comprehensive performance assessment, although each would have to show it was capable of delivering.
One senior local government figure described the pilot as 'the best proposal to come out of central government since public service agreements'.
'It's a win/win situation for the government - the Department for Education & Skills and the Department of Health will get more done through a devolved model of accountability than through the current regime,' he said.
But he warned the success of the scheme would depend on strengthening government offices in the regions.
Sheffield City Council chief executive Bob Kerslake said the move reflected a maturing of the relationship between central and local government.
'It is a real achievement for the ODPM to have brought the other departments on board, and also demonstrates the involvement of local government in the process of developing the proposals,' he said.
Sir Sandy Bruce-Lockhart (Con), chair of the Local Government Association, described local area agreements as 'a concrete way forward'.
'We know we have the desire from the local government minister and the deputy prime minister to decentralise to councils,' he said. 'The big question is whether that desire is shared by No 10 and the secretaries of state in the spending departments. If it is, we've got the show on the road.'