Nestrans was successful in applying for 100% of the cost of the works to the Scottish Government's Regional Transport Active Travel Grant scheme.
The works dovetail with the council's Integrated Travel Towns Masterplan proposals for Ellon which aim to support active travel, walking, cycling and wheeling for short journeys made in the region's towns.
Phase 2 of the works covers the section between Station Road heading northwards to Ness Circle and will involve a temporary closure lasting three weeks.
A pedestrian diversion will be provided by way of Ness Circle and Commercial Road.
The works are again being carried out by personnel from Aberdeenshire Council's Roads Service and have been programmed during the school summer holidays to avoid disruption to pupils walking to and from school.
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Ian Daniel of the Roads Service said: "The safety of the public and that of the construction team is paramount and we request that everyone observes all safety signage and avoids entering the construction site areas."
Cllr Peter Argyle, chair of Aberdeenshire Council's Infrastructure Services Committee, said: "It is great to see the combined efforts of ourselves, Nestrans and our funding partners developing facilities for walking, cycling and wheeling across the North east of Scotland.
"I am delighted with the quality of the works being undertaken by our Roads teams and these improvements will make a real difference to this section of the Formartine and Buchan Way and will continue to be a great attraction of walkers and cyclists for many years to come."
Chair of Nestrans, Councillor Sandra Macdonald, added: "The Formartine and Buchan Way is one of the great treasures of the North East. As a traffic-free green space, this historic route is not only an important part of our local active travel offering, but a fantastic attraction for visitors as we enter a summer of 'staycations'.
"Working with partners, I'm pleased that together we've been able to deliver major investments to the Formartine and Buchan and Deeside Ways, as well as continuing to improve, upgrade and develop new routes across the region."
The Formartine and Buchan Way features as one of NatureScot's Scotland's Great Trails and, along its length, includes sections of the Sustrans National Cycle Network Route 1.
The 40-mile former rail line runs from Dyce to Fraserburgh and features a 13-mile spur from Maud to Peterhead.
A haven for walkers and cyclists, the Formartine and Buchan Way passes close to a host of popular attractions along its route including Aden Country Park, Deer Abbey, Drinnie's Wood Observatory and several historic stone circles.
