The United States, Britain and the European Commission have all signed up to the fund, Bulgaria's Foreign Ministry said on Friday.
Libya has sentenced five Bulgarian nurses and a Palestinian doctor to death by firing squad, after convicting them of deliberately infecting 426 children with HIV in a hospital in the Mediterranean port of Benghazi.
About 50 of the infected children have died.
The nurses say their confessions were made under torture. Aids experts told a Libyan court the outbreak started before the nurses arrived and was probably caused by poor hygiene.
Bulgaria, the European Union and the United States have all denounced the verdicts and the case has become a hurdle to Libya's attempts to end its international isolation.
Libya's Supreme Court has scheduled an appeal hearing for 25 December although officials do not expect a final ruling until January.
Many Libyans want the Bulgarian
medics to be hanged
"The international fund will be set up to support the families in Benghazi as part of international efforts to find a solution acceptable to all parties following the tragic HIV outbreak in Benghazi," the Bulgarian Foreign Ministry said in a statement.
It declined to specify the size of the fund, but an official of the Qadhafi Charity foundation, chaired by the influential son of Libyan leader Muammar al-Qadhafi, Saif al-Islam, said in Tripoli: "The Libyan and Bulgarian sides will meet next Wednesday, to work out an agreement on the precise amount of compensation to the families of the HIV-infected children."
The official added: "The two sides also will try to agree on details about the medical care and welfare of the sick children."
Libya has in the past suggested the verdicts could be quashed if the children and their families receive ample humanitarian aid. The charity official said, however, the "court is independent and its decision will not be influenced by the agreement".
Sofia has said the establishing of the fund will not automatically trigger the release of the medics, who have been in jail in Libya since 1999.
"The international fund will be set up to support the families in Benghazi as part of international efforts to find a solution acceptable to all parties following the tragic HIV outbreak in Benghazi"
Bulgarian Foreign Ministry statement
"For the moment we do not have a reason for optimism, because we have yet to see what the court will rule on Sunday," said Foreign Ministry spokesman Dimitar Tsanchev.
He said the fund was intended only to help the families of the sick children, and reiterated Bulgaria's position that the nurses were innocent and that it would not pay compensation that could be seen as an admission of their guilt.
The fund will coordinate the distribution of financial aid to the families of the infected children. It will also provide treatment for the children and help modernise Benghazi hospital.
The fund will be run by a board including representatives of the Qadhafi foundation, Bulgaria and the EU Commission, and Aids experts from Libya and the Baylor College of Medicine in Texas.
Earlier on Friday, Georgi Parvanov, the Bulgarian president, said he expected a breakthrough in talks for the release of the medics, the daily 24 Chasa reported.