The Bangladeshi government and the UN Development Programme (UNDP) have agreed to invest $50m in the south-eastern Chittagong Hill Tracts.
Rebel groups there have been fighting for autonomy for over 20 years.
Government officials say the project will help the implementation of a 1997 peace deal with rebels of the Jana Shangati Samity (JSS) group.
The project aims at strengthening the local economy. The UNDP will invest money until 2009, officials say.
The project, the Promotion of Development and Confidence Building in the Chittagong Hill Tracts (CHT), aims at reducing poverty and strengthening local institutions to function more effectively, says the UNDP.
"The common goal of this project is to build confidence and to turn peace initiatives into development realities that will reduce poverty and benefit the people," said Jorgen Lissner, UNDP's resident representative in Bangladesh.
The BBC's Shahriar Karim in Dhaka says the troubled area regularly sees clashes not only between the two factions of the rebel group but also between the rebels and the security forces.
A JSS rebel leader, Santu Larma, said the project might help bring in some development to the area but it would not guarantee long-term peace.
"The government is not sincere enough to implement the accord. These projects will not help until we can establish democratic rule in CHT," he told the BBC.
Our correspondent says that after the peace accord in 1997 many donors agreed to finance developmental projects in the area but the abduction of three foreign professionals in 2001 reversed the whole process.