Birmingham City Council said the additional cash will be used to increase the rate nursery providers receive to offer free places for the period up to April 2016.
The move comes after a study by accountants KPMG found that private, voluntary and independent providers in the city were underfunded, and many risked closure.
The report found that a "significant number" of the 550 early years providers in the city would "withdraw their provision" for financial reasons.
Brigid Jones, lead member for children’s services at Birmingham Council, said it costs many childcare providers more to provide 15-hours of free early education each week for two-, three- and four-year-olds than they get in funding.
"If we don’t provide this vital extra support there is a real danger that many of these places could go out of business, and children would lose out," she said.
"So it is absolutely right that we take this step to support these places that provide such an important service. We need to ensure that our youngest children have the best possible care at such an important stage in their development."
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