The aim of the project is to encourage and fund research into what the government describes as the three R's - reduction, replacement and refinement. This will include exploring alternatives such as computer simulations and experiments on cultured cells.
The announcement is an indication to the pharmaceutical industry of the need to review alternative methods of drug testing and to step up investigations into more effective, cost-efficient means of R&D.
2.71 million procedures were carried out on 2.64 million animals during 2000. The greatest use of animals for non-toxicological purposes was for pharmaceutical research and development, accounting for 20 per cent of experiments. Next came immunology and cancer research at 16 per cent and 11 per cent respectively.
Despite these figures, the advances in biological knowledge and new technology - much of which has come from the pharmaceutical industry - have led to big reductions in the number of animals needed in many areas of research. Over the past 20 years, the total has fallen by nearly half.
The new institute, which is to be called the National Centre for the Replacement, Refinement and Reduction of Animals in Research, will benefit from a rise in funding from £330,000 (€494m) to £660,000 in this financial year.
It will monitor and promote best practice in nationwide centres of excellence and science and will link and build upon the Medical Research Council's existing centre for best practice.
Understandably, the government's establishment of a national centre to coordinate the use of animals in medical research has received a mixed response.
The Association of the British Pharmaceutical Industry (ABPI) welcomed the move as a way of improving the quality of research and the welfare of animals.
Dr Philip Wright, director of Science and Technology at the ABPI said on its website: "The UK-based pharmaceutical industry is already at the forefront of investment and development of the 3Rs, but the Government's intention to build on the excellent work of the Centre for Best Practice in Animal Research (CBPAR) is very welcome."
"The industry already has good links with CBPAR and we are very much looking forward to working constructively with the new centre."
The new centre will retain CBPAR's practical approach to sharing best knowledge and will build on the excellent networks already created between industry and academic institutions.
However, there is real concern that the centre will drive a wedge between animal welfare groups and those who remain implacably opposed to animal experiments. For them the total ban on animal testing is the only solution.
Jan Creamer, chief executive of the National Anti-Vivisection Society told BBC News Online: "It is disgusting that they rule out debate. We have been lobbying for years for a national centre for replacement."
"But we can't take part in an organisation that funds animal experiments, because it would be at odds with our remit."
She continued: "Refinement and reduction already have plenty of money spent on them - it is replacement that is starved of funds."
The investment by the UK Government could be seen as a way to appease pharmaceutical companies who recently expressed discontent at the rising number of violent attacks by animal rights extremists. The industry has made it clear it will not make any new investments in research in the UK unless the intimidation is brought under control.
In January, Cambridge University abandoned plans to build a £32m neurology centre, in part because of the costs of protecting against attacks.
Commenting on the decision, Trevor Jones, chairman of the Association of the British Pharmaceutical Industry told the Financial Times: "I can see no further investment in this country in research and development unless this is resolved rapidly."
"What sort of nation are we that cannot control these type of terrorists in our streets?"
"If animal extremism is not stopped, it will cause enormous damage to the industrial and academic research base in this country."
The government responded this month to industry demands for a specific legislation against animal rights activists, confirming plans to bring in new legislation to deal with animal extremists although the scope of the measures was still under consideration.
Science Minister Lord Sainsbury said that new rules would be drafted, but also suggested that government may not pursue a single bill, as sought by the drug industry.
The BioIndustry Assocation, which represents the UK biotechnology sector, has been urging the government to introduce a bill that will definitively deal with the ongoing violence, home visits and intimidation that it says continues to be faced by those involved in medical research using animals.