The subsidy includes e100m of taxpayers' money and the Irish agriculture minister, Mary Coughlan, said it would make Ireland the supplier of choice for quality dairy produce across the globe.
But Jim Begg, director-general of Dairy UK, said it could have a serious impact on UK processors. "It's a hugely significant move and we've already been to see Defra to talk about it.
"Ireland's a major exporter to the UK," he explained, "so this clearly gives an advantage to a competitor in our market. We're facing the same restructuring costs and British dairy companies have had to invest heavily in recent years."
New EU rules to control nitrate pollution from slurry come in next year and are expected to cost the UK dairy industry up to £400m in capital investment.
These costs in Ireland could be met by the grant, which covers investment in new plant, new premises and new jobs as well as marketing costs. Dairy UK is worried that this could free up resources to focus on cheese exports to the UK.
Defra has ruled out similar grant aid for British companies, although officials told Begg they would have to consider what action to take if the Irish move upset the UK market.
Northern Irish processors are first in the line of fire, as 30% of the milk produced in the province is sold to factories in the Republic.
Ian Stevenson at the Ulster Farmers' Union said he would be asking David Cairns, Northern Irish farming minister, for financial support to help processors move away from milk powder into added value products like cheese.
United Dairy Farmers said it was deeply concerned by the grant.