Falconer intends to ask the Treasury to earmark £6-8bn for this purpose in next summer's comprehensive spending review. He believes that some of the country's most deprived neighbourhoods are blighted by private houses that are abandoned or in need of repair.
Housing experts welcomed the proposals. Ben Derbyshire, a director of housing architect HTA, said: "The deteriorating stock of privately owned housing has not been addressed seriously for at least 10 years. We are aware of all kinds of places where such funds are desperately needed."
A source close to the DTLR said that Falconer was working on ways of setting up the fund with officials. The source added: "There's not a lot of money available for this work – not from the public sector."
Lord Falconer would not confirm that he was applying for funding, but said in a statement that addressing the problem was at the top of his agenda. He said: "We are examining the proposal and the issues it raises with urgency."
The decision to take this initiative follows pressure from six councils – Manchester, Leeds, Birmingham, Liverpool, Sheffield and Newcastle upon Tyne – and the National Housing Federation.
They wrote to Falconer with proposals for a fund arguing that £6-8bn was required over 10 years to improve poor housing and build homes on brownfield sites.
A spokesman from Manchester council said that the funding would cover the country, but said the issue of dilapidated private housing was more of a northern problem.
Manchester councillor Basil Curley added: "A fund that tackles housing renewal and regeneration is the key to unlocking the potential of deprived neighbourhoods, reversing the spiral of decline and at the same time achieving the government's vision of sustainable communities."
Council representatives are due to meet Falconer on 21 December.
n Lord Falconer explained his thinking on the planning green paper this week in a speech to the CBI. He said he wanted business and developers to work with communities over the proposals.
He said the supplement to the green paper on section 106 agreements – so-called planning gain deals – would be used to increase affordable housing provision.
Falconer said these agreements were not sufficiently transparent and this caused uncertainty in the planning system.
He said: "We need processes for making section 106 agreements that are efficient."