The development aid will be focused on water, sanitation and support for refugees. A further €100 million aid credits unspent last year will be also spent in 2012, the European Commission said in a statement.
"The decision shows our commitment to help the people of Palestine in the areas which are vital to their everyday lives," said Stefan Fuele, EU commissioner for enlargement and European Neighborhood Policy.
The European Union has been critical of Israeli settlement building and curbs on economic development in the West Bank.
EU foreign ministers in May expressed "deep concern", saying that such moves made it impossible to create a Palestinian state alongside Israel.
Israel condemned that report as "biased", saying the report would do nothing to help promote peace in the region.
The funds announced Friday include €7 million in support for Area C, the 60% percent of the West Bank which is under Israeli control and where most Jewish settlements are located.
Area C contained natural resources and land "which are crucial to the future economic growth of a Palestinian state", Friday's Commission statement said.
"It is currently almost impossible for Palestinians and international donors to obtain building permits in the area, and community buildings and essential basic infrastructure (like rainwater harvesting cisterns) are regularly demolished," the Commission said.