Ministers want mosques to take a stronger role in tackling extremism
Police and local councils have been issued with new guidance on preventing people turning to violent extremism.
The 72-page document stresses the need to support "moderate" Muslim voices and encourage positive role models to build up "resilience" to extremist ideology.
Community groups and councils in England and Wales will get cash from a £12.5m fund to help achieve these aims.
Ministers want to highlight efforts to prevent terrorism, as they seek increased powers to detain suspects.
Home Secretary Jacqui Smith told Sky News: "In the short term we need to do what's necessary to stop those who are plotting terrorism now but in the long term what we need to do is to prevent people from becoming terrorists in the first place."
Ms Smith is facing a battle with MPs to extend the time police can hold terror suspects without charge from 28 days to 42 days.
Critics say the move risks alienating Muslims and feeding extremism but the government says the increasing complexity of terror plots means it may soon be necessary to hold suspects for longer than currently allowed.
The government says it wants to give Muslims the confidence to challenge extremist voices in their community - and divert vulnerable young people at risk of being radicalised.
Explaining the strategy, Ms Smith said: "Where someone is beginning to think about becoming a violent extremist, it is probably better if you get the mentor alongside them, discourage them from that, argue with them, prevent them from going that extra step to actually becoming an extremist."
Police will lead projects to identify those who are thought to be at risk of being targeted by extremists and more support will be given to "mainstream voices" who oppose extremism.
The government will also create "safe spaces for debate about grievances" where young people can debate "extremism issues".
The Prison Service is also being asked to carry out further work to tackle radicalisation among inmates.
In its introduction to the new guidelines, the Home Office said: "We are clear that it is not the role of government to seek to change any religion.
"However, where theology is being distorted to justify violent extremist rhetoric or activity and threaten both Muslims and non-Muslims, government should reinforce faith understanding and thereby build resilience.
"We will facilitate debate to expose the paucity of the extremist message.
"We are clear, however, that these initiatives must be community-based and community-led."
The new initiative to prevent radicalisation is one of the four prongs of the government's counter-terrorism strategy, known as Contest, which includes pursuing offenders and disrupting threats.
The strategy was welcomed by West Midlands Police - seen as one of the key areas where extremists are active.
Chief Superintendent Paul Scarrot told the BBC: "It's about dealing with the problem at its origin.
"Instead of picking up the pieces, let's do something about it and work with all communities, whoever they are, to prevent extremism."
But others have expressed concerns that the proposals would be ineffective and risk alienating young Muslims.
Muhammad Khan, of Birmingham University, who has campaigned against negative portrayals of Muslims, said: "It really is like trying to sell Christmas to a Turkey.
"I know organisations who are reluctant to accept funding on the basis of preventing violent extremism, simply because they feel they would lose integrity - it would compromise access to young people."
BBC home editor Mark Easton said many mosques were signing up to the strategy and that the timing of the announcement was significant.
He said: "The government wants to reassure the country - and its own backbenchers - that when it comes to fighting extremism, it's about carrot as well as stick."