REGIONAL aid will be redistributed throughout Scotland and spent on fewer but more deserving areas, according to proposals unveiled by First Minister Donald Dewar yesterday. Spending will continue at #80m a year but will cover less than half of the population. Until now, it has covered two-thirds.

By redrawing the regional assistance map, Ministers believe they can target spending more effectively by cutting out better-off areas in favour of others, including parts of the Borders, with economic problems. From January 1 next year, the money will go mainly to inward investors and indigenous firms.

Mr Dewar has chosen to assess need right down to local council ward level, taking into account unemployment. Before, need was judged in travel-to-work areas, which included some better-off suburbs. ''The old way was too blunt an instrument,'' a spokesman for Mr Dewar said. ''Now the assessment of need is much more sensitive.''

Other criteria such as Gross Domestic Product have also come into play but the main reason for the drop in population covered is that Scotland's overall economic performance is improving in comparison with other areas of the UK, Mr Dewar said.

Enterprise Minister Henry McLeish pointed out that Scotland is now the third best off ''economic region'' in the UK, behind London and the South-east of England. Compared with UK average GDP of 100%, Scotland is on 99%, Northern Ireland on 82%, Wales 84%, and the North-east of England 85%.

When the aid map was last drawn up in May 1993, Mr McLeish said, Scotland had 243,686 unemployed, and today it had 134,712 - a reduction of 46%.

Mr Dewar's proposals must now go before the European Commission in Brussels for approval although the money comes from the Scottish block.

Under the new proposals, 49% of Scots will be covered, compared with 64% previously. However, Mr Dewar said the ''great sweep'' of areas helped by regional selective assistance (RSA) would continue to benefit. For the first time, they will include 36% of the troubled Borders.

On paper, the new system has not proved a major winner in areas such as East Renfrewshire, which previously attracted 100% cover and now has only 10%. East Dunbartonshire previously had full cover and now faces only 28% of its people in RSA-supported areas.

Mr Dewar emphasised that the money going to such places would be better targeted and said that in Dunbartonshire, for example, the most needy areas would still receive 90% of previous funding.

Areas which will gain include Edinburgh, Highland, Moray, Orkney, and Stirling, assuming the Commission orders no changes under European law.

Mr Dewar said the whole of the Highlands and Islands was being put forward for RSA. This would mean even more aid than the sums negotiated at the Berlin summit by Prime Minister Tony Blair to replace Objective 1 assistance.

Scottish Enterprise welcomed the proposals and said they would particularly benefit key sites close to centres of population attractive to new companies, while encouraging existing firms to expand.

An SE spokeswoman said: ''They show great imagination in linking opportunities to areas of greatest need, which will be important for employment creation in disadvantaged areas.''

She expressed pleasure at parts of West Lothian continuing to have assisted-area status: ''This will be crucial for the development of the Alba Centre, which aims to make Scotland a world centre for micro-electronics by attracting high-quality, design-driven investment providing highly skilled jobs. The addition of parts of the Borders to the map will enable us to attract much-needed investment into the area which has been hit by economic difficulties recently.''

SNP Shadow Enterprise Minister John Swinney said: ''At a time when unemployment is rising in Scotland - and falling throughout the UK as a whole - cutting the population covered by assisted-area status north of the Border is a damaging move.

''This was one of the key industry policy functions reserved to Westminster and Scotland has been the loser in the horse trading that has clearly taken place between London-based Ministers.''

Tory economy and industry deputy spokesman Nick Johnston welcomed the allocation of funds to Scotland's hardest hit regions and expressed his ''delight'' at the inclusion of new areas and Highlands and Islands. Nevertheless, he attacked the Government's ''damaging record of neglect''.

Scottish Liberal Democrat Borders MP Michael Moore said: ''I am pleased to see the deep-seated economic problems of the Borders at last receiving recognition. I hope this is the first step in a concerted effort to push the regeneration of the Borders economy to the top of the political agenda.''