Obama unveiled the development aid to coincide with the formal opening of a United States Agency for International Development (USAID) mission in Burma on Monday, which was suspended for years over the junta's repression of the democracy movement.
The money, spread over a two-year period, will target projects in civil society designed to build democratic institutions and improve education as Burma lays the groundwork of a political system based on freedoms, an official said.
"A USAID mission sends a significant signal that the United States is back in terms of our engagement in Burma," a senior official said on condition of anonymity, using the country's former name.
"We can use that assistance to help reward positive steps taken by the government and the people of Burma, because we want this top-down reform to reach the people from the bottom up in Burma.
"That's the next step that needs to take place in this transformation."
The officials stressed that the $170-million combined pledge for the 2012 and 2013 fiscal years was the start of a longer-term mission to Burma, but more aid would be contingent on the government keeping up the pace of reform.
Obama will become the first sitting US president to set foot in Myanmar when he arrives in Rangoon later on Monday, seeking to reward and deepen a startling reform drive led by President Thein Sein.
The president will also meet democracy leader Aung San Suu Kyi at the lakeside villa, where she was held for years under house arrest, and also give a speech at Rangoon University, a traditional cockpit of student unrest.
The Obama administration announced earlier this year that it would re-open an aid mission to Burma, which has been closed for two decades. The organisation has however been providing humanitarian help to Burma over the last 12 years in a more informal way, including after the devastation of Cyclone Nargis which left around 138 000 people dead or missing.
Foreign aid has become crucial in filling the gaps left by a government that spent just 0.9% of its budget on health in 2007, according to the World Health Organisation – substantially lower than any other country that year.
According to Save the Children, at least a third of all children in Burma are malnourished and one in 10 dies before the age of five.
In the past, overseas governments have scaled down aid in protest at rights abuses in Burma, or felt forced to pull out because of the junta's tight controls. – Sapa-AFP