US State Department spokesman Richard Boucher said non-governmental educational and other groups inside Iran, which are willing to work towards achieving democracy in Iran, are eligible to compete for the money.
Iran's ambassador to the United Nations, Muhammad Javad Zarif, called the plan a clear violation of a US-Iranian agreement which was signed in Algeria in 1981 following the release of 52 US embassy employees held hostage in Tehran for 444 days.
Boucher denied that the initiative violates the agreement, under which the US pledged "not to intervene directly or indirectly, politically or militarily in Iran's internal affairs".
Iranian exiles have voiced
support for democratic change
The US has consistently maintained that its pro-democracy activities abroad are non-partisan and do not constitute intervention.
Hostility between the two countries has not abated since the hostage crisis of 1979.
US suspicions that Iran is developing nuclear weapons is just one of many sources of friction.
Aside from Cuba, Iran is the only country with which the US does not maintain a political dialogue.