The bulk of the cash will go towards Musharraf's efforts to push "enlightened moderation", particularly in education. Musharraf has been targetting religious schools, saying that they are radicalising youngsters.
The British government has also been on a drive to curb what it sees as an apparent rise in radicalism among young men in its 1.6-million Muslim population, particularly after last year's attacks on London's public transport system that killed 56.
Three of the four bombers were Britons of Pakistani origin, while two of them visited Pakistan in the year before the attacks, allegedly for training and instruction from al-Qaeda.
British intelligence and police have in recent months expressed concerns about Pakistan's role in influencing British Muslims travelling there.
A number of people, including one British Pakistani, were detained in Pakistan in August this year as part of an alleged plot to blow up transatlantic passenger jets from Britain with liquid explosives.
Blair will also meet religious scholars, visit a mosque, and hold talks with Shaukat Aziz, the Pakistani prime minister.
The talks with Musharraf will touch on the situation in Afghanistan, where about 4,500 British soldiers are engaged in fighting the Taliban in the south of the country as part of a UN-sanctioned, Nato-led mission.
The leaders' last meeting in London in September was overshadowed by a document written for a British military think-tank that claimed that elements of the Pakistani intelligence were indirectly supporting groups such as al-Qaeda.
There have since been fears among senior Nato figures and Afghan officials about Pakistan's commitment to tackling fighters opposed to the Afghan government who hide out along the countries' rugged border.
Musharraf has defended his actions, pointing to the number of arrests of suspected al-Qaeda figures on the West's behalf, as well as targeting centres allegedly used by militants.
Britain - home to 800,000 people of Pakistani origin - has said it is "satisfied" with the level of co-operation from Pakistan and is keen to build upon the partnership as well as support Musharraf's reform agenda.
Blair's visit comes as his office sought to play down comments he made during an interview with Sir David Frost on Al Jazeera's English television channel on Friday in which he agreed that the war in Iraq had been "disastrous".
As Blair flew to Islamabad, Gordon Brown, his finance minister and likely successor, met British troops in the southern Iraqi city of Basra and pledged nearly $190m over the next three years for reconstruction.