The Foreign Office is to put £40,000 into a programme to promote better ties between Jews and Arabs in Israel.
UK Ambassador to Israel Matthew Gould announced the grant on Sunday in support of the work of the New Israel Fund and the UK Task Force on Issues Facing Arab Citizens of Israel.
The money will go to the Mixed Cities project in Acco and Lod, an initiative run by the NIF's social action arm Shatil to build civic links between the cities' Jewish and Arab populations.
Mr Gould, a guest at the NIF's annual dinner in London, said that he now found divisions in Israel society - "between Jew and Arab, between secular and religious, between rich and poor" - bigger than he remembered as a student tourist to Israel years ago.
"I believe that these gaps matter… because one of Israel's strengths has been its cohesion. What many of its friends have most admired about Israel is that it can be at once a homeland for the Jewish people and a country that treats its citizens equally," he said.
"So when I see in the Knesset legislation which appears to be contrary to that vision of Israel's founders, it really worries me."
The guest of honour, novelist AB Yehoshua, warned that Israel was heading "slowly and blindly" towards a binational state in 10-15 years.