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Conservation Minister Nick Smith announced the funding yesterday to about 50 trustees and supporters of the project at Martins Bay, and also signed a memorandum of understanding between the trust and the Department of Conservation (Doc).
Dr Smith, who flew to the area from Codfish Island, where he released kakapo chicks, said he hoped kiwi and kakapo could be released in the lower Hollyford Valley some day.
It was an area of ''stunning natural beauty'', but rats, stoats and possums posed a threat to its flora and fauna such as beech, podocarp and southern rata, and mohua, blue duck (whio), saddleback, kaka and the Fiordland penguin.
The grant would help the trust set up rat and possum poison bait stations and a stoat trap network to stop the decline of the area's bird populations, while the Department of Conservation would support the project by dropping 1080 on the hills surrounding the area, he said.
The area, which is north of Milford Sound and accessible only by air or three to four days' walk, extends from Martins Bay inland along the shores of Lake McKerrow.
It contains 19 freehold sections - many with cribs - that date back to a failed settlement in the late 19th century.
Trustee Peta Carey, of Queenstown, told the Otago Daily Times last week the trust was formed after the landholders responded with ''overwhelming support'' to a suggestion by Doc they collaborate in pest control work.
Ground operations are expected to begin this spring.
Dr Smith said the collaborative approach of the group, which involves private landowners, tourism operators and iwi, was commendable.
''This display of community spirit reflects the new direction by Doc to partner with more local volunteer organisations on recreation and conservation projects.''
Trust chairman Ron Anderson, of Dunedin, said the presence at the launch of children from families with a long association with the area was significant.
''Our vision for the restoration of the flora and fauna of the Hollyford Valley is 10, 20 years into the future.
''It's not necessarily for us - it's for our children, for future generations of New Zealanders.''
The $200,000 funding will come from the Community Conservation Partnership Fund announced in March.
The fund provides $26 million over the next four years to community organisations undertaking natural heritage and recreation projects.