The European Investment Bank (EIB) says it will provide Israel with loans worth 275m euros (£168m) to help promote businesses and environmental projects.
Israel's economy had been performing strongly earlier in 2006
One loan is for 200m euros and aimed at 400 projects such as building recycling and waste water treatment plants.
A 75m-euro loan will finance expansion of small- and medium-sized firms in sectors including tourism and health.
The loans are the first to Israel in more than a decade by the EIB - part of the EU's investment operation.
Israeli Finance Minister Abraham Hirchson said: "The bank's commencement of activity in Israel and its allocation of credit convey the European Union's confidence in the Israeli economy."
He added that the deal signified that "an upgrade in economic relations between Israel and the EU".
Israel's $130bn (£66bn) economy was on course to grow by more than 5% this year, before its invasion of southern Lebanon.
However, the economy is expected to have slowed because of a subsequent drop in tourism and manufacturing output.