India and Sri Lanka have signed a deal to rebuild the 90km rail line from Omanthai in Vavuniya to the Pallai in Sri Lanka's war-damaged Northern Province.
Under the deal, India will provide a credit for $185m and work will be carried out by the Indian government company IRCON International.
Construction is expected to begin in the first quarter of 2010 and finish in two-and-a-half years.
The Omanthai-Pallai stretch is one of the five phases planned to rebuild the entire northern railway tracks that have been out of operation due to war since 1987.
Of the four other phases, India has agreed to fund the $81m Medawachiya-Madu section as well as the $149m Madu-Talaimannar section.
Work is underway on the Sri Lanka-funded Vavuniya-Omanthai section and the fifth 56km Pallai-Kankesanturai rail section is expected to be carried out with Chinese funding.