Natural Resources Minister John Griffiths announced the funding as part of the Collaborative Change Programme, which is allocating funds to support councils to make improvements to their recycling services.
The funding will enable the council to invest in new vehicles, containers, depots and equipment to move to a kerbside sort system of recycling.
This also involves sorting materials at the kerbside into different compartments of a specialist collection vehicle.
John Griffiths said the programme provides specialist advice and support to help local authorities to achieve their recycling targets.
“By separating recycling, there will be less contamination, which means that the materials can fetch a higher price for the council. I hope this means that more materials will stay in Wales for use by Welsh companies, helping Merthyr Tydfil County Borough Council to avoid landfill taxes, increase their recycling rates and support recycling markets in Wales.”