Communities Scotland granted the award to the Greyfriars Community Project, a shop which sells products made by homeless people, to support the shop and also its workshops where the products are made, reports the BBC.
The project is the fruit of a partnership between Greyfriars Kirk, the Grassmarket Mission, the Edinburgh Cyrenians and Hillcrest Housing Association.
It hopes to create 10 full-time jobs and help 60 people into a job.
Roddy Macdonald, head of the social economy unit at Communities Scotland, said: "The Greyfriars Community Project is working to help vulnerable people in Edinburgh and through its work will help renewal and reinvigoration efforts centred at the heart of Edinburgh's historic Old Town.
"The project's ambitious plans aim to bring support to help people into training and work."
Richard Frazer, Greyfriars Kirk minister and chairman of the Community Project Steering Group added: "This award from Communities Scotland is a real boost for our project and a vote of confidence for the work already being undertaken at Greyfriars.
"The opportunity to give people the skills and confidence to turn a house into a home, to overcome loneliness and destructive lifestyles and to aspire to success in life is what our project is all about."
The shop will also sell vegetables from the organic farm run by the Edinburgh Cyrenians, an organisation that helps disadvantaged people in the city in areas such as housing, employability, health and well-being.
