The government has given its backing to the £10bn Crossrail scheme which will link east and west London.
The rail link will stop at key central London stations
Transport Secretary Alistair Darling told the Commons the scheme, which will be funded by taxpayers and business, was a "huge challenge".
The government also announced it will give an extra £340m to transport links needed to underpin the Olympic bid.
But in the Commons on Tuesday Mr Darling said the scheme would not be ready in time for the 2012 Games.
Mr Darling said the government would work with London mayor Ken Livingstone and the private sector to find the cash to pay for Crossrail.
The rail link will run through tunnels in central London, stopping at key Tube stations such as Bond Street, Tottenham Court Road and Liverpool Street.
Under the current plan, Crossrail would provide 24 trains an hour in each direction and be capable of carrying 160,000 morning rush-hour passengers.
Mr Livingstone welcomed the go-ahead for Crossrail and an agreement on Transport for London's borrowing that allowed the East London line extension to be undertaken.
He said Crossrail would provide "the backbone of a 21st Century transport system".
On the East London line he said "the first phase of this project is a big boost for everyone in east and south London who have campaigned for this vital new Tube line."
'No more delays'
The Corporation of London's Michael Snyder, said they were "delighted" with the announcement.
"We must all now move quickly to pin down finally the route and the funding so that there are no more delays.
"We now at last have the real chance to build the rail service that London needs for the 21st Century."
Rufus Barnes, director of the London Transport Users Committee, said: "The government's agreement to introduce a hybrid Bill is a welcome step forwards, but we still don't know how it will be paid for, or, who will pay for it."
However he added that it was "refreshing" that the government was being creative in looking for new ways to fund this "vital" project for London.