More than $9 million in funding will be used to deliver the 32-kilometre Picton to Colo Vale Rail Line project, reopening the historic loop line.
The funding comes from the NSW Government's $3 billion Infrastructure and Job Acceleration Fund, and promises to deliver a major tourism boost to both Wollondilly and Southern Highlands regions.
The rail line between Picton and Buxton will be upgraded, while the further section between Buxton and Colo Vale will be reopened to allow more heritage trains to operate from the popular NSW Rail Museum at Thirlmere.
A stretch of track just north of Hill Top which is currently inaccessible to the public (through the deepest railway cutting in the southern hemisphere) will also be upgraded.
Wollondilly MP Nathaniel Smith said the extra funding was a great boost for the region.
"Reopening the loop line to Colo Vale adds capacity, and the longer rail excursions will create a more authentic experience of what it was like to travel during the golden age of steam trains," he said.
"Based in Thirlmere and just an hour from Sydney, the NSW Rail Museum has long been a popular attraction for families and rail enthusiasts drawn to Australia's biggest collection of heritage trains.
"Big Hill Cutting will be the highlight of the loop line when it is reopened, providing a unique experience that will draw and delight families and rail enthusiasts alike."
Work on the Picton-Colo Vale Rail Line project will begin shortly.
Mr Smith said the NSW Rail Museum was the largest tourist attraction in Wollondilly and as such the upgrades were expected to support the area's recovery following the devastation of the Black Summer bushfires.
"When this line was first built in the 1860s, it brought the local villages to life and its reopening will do the same," he said.
"There are plans for village market stalls to spring up along the line selling locally grown and made produce, further adding to the visit experience and providing a much-needed economic boost to local businesses."
The single track Loop Line was established during the 1860s, but has not been used for 44 years.
Mr Smith had long touted the idea of reviving the long lost track before being elected, was able to secure $5.5 million in state funding for the project back in 2019.
Transport Heritage NSW chief executive Mr Andrew Moritz said the project was a game-changer for the NSW Rail Museum and local region.
"This funding realises a long-held vision of our members, volunteers and the local community to see heritage trains operate the full length of the loop line and meet increased demand for our heritage train experiences."
The museum announced earlier this year that recycled rail from the Griffith to Junee line was being used to replenish the line.
The organisation's operations manager Daniel Page said the 110m length rails would be used to repair the current track and revive sections which had long been unused.
The final stretch of the loop line between Colo Vale and Braemar is not being reactivated as part of this project.