"These people have lived and owned land in Puttalam since 1990, but without any legal land ownership documentation," World Bank said in a statement.
"At present there are over 60,000 people living in 141 refugee camps with 41 percent being children who have known no other home than these camps."
The Puttalam housing project will rebuild houses, provide safe drinking water, sanitation, improved drainage facilities, and regularize land titles for the refugees.
The refugees became displaced in an ethnic cleansing drive of the Tamil Tigers aimed at driving out Sinhalese and Muslim resident of the Jaffna peninsular.
The Muslim residents of Jaffna, who mostly settled in Puttalam, were given two hours to leave the city on October 30, 1990 by the Tigers. Refugees later said they were only allowed to take 150 rupees in cash and what they were wearing.
The World Bank project would also improve access to public utilities to the larger population of the area.
Sri Lanka's Ministry of Resettlement and Disaster Relief Services, is running the project, working with the National Water Supply and Drainage Board, and the North West Provincial Road Development Authority, the World Bank said.
The Sri Lanka government is getting the money from the World Bank's concessionary International Development Association window as a 20-year loan with a 10-year grace period.
"It is critical that needs of these very vulnerable people are met and assistance provided to bring normalcy to their lives after 16 years of displacement," Naoko Ishii, World Bank Country Director for Sri Lanka said in the statement.
"A special feature of this project is that it is designed to support not only the social and economic integration of these IDPs but also some of the needs of the adjoining vulnerable non-IDP communities through shared development activities such as drinking water schemes, sanitation, and resolution of land disputes."
The project will help re-build 7,885 houses and provide safe drinking water to 136 refugee camps and over 3000 non-IDPs families, the World Bank said.
About 10,000 latrines would be built which will protect water resources and improve overall sanitation. Refugee camps will be redesigned and upgraded into organized settlements.
Displaced families will get two cash grants of 250,000 rupees (2,300 US dollars) to build a new house or a grant of 100,000 rupees (900 US dollars) to complete a partly-built house.
Sri Lanka's internal conflict has cost more than 60,000 lives over two decades and left hundreds of thousands displaced.
In 2006, thousands of Tamils from the northwestern Mannar district and the northeastern Trincomalee district in particular, where there is a large Sinhalese population fled to India amid accusations of ethnic cleansing by Tamil activists.
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