An extension of the UK's Midland Metro light rail line into Birmingham city centre and the purchase of a new fleet of trams will be funded by the UK Government.
The government will contribute £81m ($123m) towards the £127m ($194m) project, according to Transport Minister Chris Mole.
Mole announced the initial approval to build the new line and acquire 20 higher-capacity trams to replace the 16 Ansaldo cars used on the 20km Birmingham–Wolverhampton route.
The Midland Metro maintenance depot will also be rebuilt and stops lengthened to accommodate longer trams.
Tenders for the projects are expected in autumn and construction work is likely to start in 2012.
The 1.4km extension is scheduled to open by 2014.