Cash incentives are being offered to local Liberal Democrat parties who recruit women and people from ethnic minorities to stand for election.
The Lib Dems no longer have any ethnic minority MPs
A first tranche of £200,000 is available now. Senior Lib Dems deny the plans amount to a bribe.
They say action is needed because all of the party's 63 MPs are white and only nine are women.
Some activists oppose the move, saying it is unfair discrimination. But a bid to reject the measure was voted down.
The conference has also heard foreign affairs spokesman Michael Moore call for an urgent rethink on Iraq and Afghanistan.
Tony Blair's foreign policy was putting the UK at odds with most of the rest of the world, said Mr Moore.
Home affairs spokesman Nick Clegg, seen as a rising star, used his conference speech to accuse Labour of incompetence on crime and immigration.
What Lib Dem members think of plans to give extra cash when women and ethnic minority candidates are chosen.
In the diversity debate, delegates agreed to ensure that making the Lib Dems more representative is one of the party's core priorities, alongside proportional representation in elections.
In 2001 Lib Dems voted against having all-women shortlists when selecting election candidates.
And last year the conference rejected proposals to make candidate shortlists represent the ethnic make-up of local communities.
The party's only ethnic minority MP in the last parliament, Parmjit Singh Gill, was defeated at the general election.
The new move comes as the Conservatives try to use an A-list of candidates to select more women and ethnic minority for winnable seats.
Sir Menzies said the Lib Dem fund was "new money" given to the party for the specific task of recruiting women and people from ethnic minorities.
He said: "It will be worth several hundred thousand and we already have a first pledge of £200,000..."
"This is a message for those people who support the Liberal Democrats - and for those who don't - who think we aren't serious about getting more women and ethnic minority MPs into parliament. We are."
Sir Menzies' chief of staff, MP Norman Lamb, told reporters: "It is not a bribe, it is an incentive. We are a democratic party. We are saying to people if you select an ethnic minority or woman candidate you will get access to this fund."
He added: "Ming is deadly serious about making a difference here and making sure our party reflects British society.
"We want to change the look of our party and make sure ethnic minority and women are properly represented at a parliamentary level."
Mr Lamb said the cash would be spent on campaigning in winnable seats - not just in the run up to a general election but over a period of years.
The first money for the fund comes from the Joseph Rowntree Reform Trust, which campaigns for reform of the democratic system
Gender charity the Fawcett Society praised the measure saying all parties must do all possible to make MPs more representative of the people they serve.
But Labour women's minister Meg Munn said: "If the Lib Dems are serious about increasing the number of women candidates they should simply introduce all-women shortlists.
"It is clearly the most successful strategy. Labour - who use all women short lists - have 96 women MPs and are the most representative of all the parties.
"The Tories have just 17 women MPs and the Lib Dems nine."