There have been books upon books written on this topic, so it's very hard to describe what to do in 2,500 characters. :) My advice is get the book "Help for Your Shy Dog" by Deborah Wood. This excellent, easy to read book is chock full with great advice.
Also, I'd strongly recommend an all positive training class. There are trainers that even have classes designed specifically for the shy/timid dog. Be VERY CAREFUL to NEVER choose a class that uses punishment (choke chain, verbal punishment, collar pops, etc.) on this dog. This dog needs a purely positive approach to training filled with fun and games. A training system that has even a bit of punishment in it could shut your dog down permanently.
Classical conditioning is also very important for you to learn. I, personally, use a bit of operant conditioning combined with classical conditioning. Learn both of these terms and how to apply them to the fearful dog. Again - I'd have to write a book to explain them. Sorry. :) They are discussed in the book "Help for Your Shy Dog" though.
Also, there are "confidence" classes at some agility schools. These are classes for shy, timid dogs that help the dogs build confidence through learning agility. The timid dogs I've worked with in agility gained benefits through building confidence with agility that lasted their entire lives.