It is understood any extension could form the first stage of cross-Pennine Northern Powerhouse Rail (NPR).
But the revelation raised concerns that Yorkshire may miss out, and both Conservative and Labour politicians stressed the whole of the North needs to see benefits of rail investment at the same time, with new east-west links in place when HS2 is completed in 2032/3.
According to two sources, Mr Grayling discussed the Liverpool idea with Mr Hammond in the hope an announcement could be made in the Budget.
But it is understood that Ministers will not make a decision until Transport for the North submits its business case for NPR next month, and any decisions are likely to be taken as part of next year’s spending review once the Government has clarity on the outcome of Brexit negotiations.
The Chancellor did use the Budget to allocate £37m of extra money to assist with developing the NPR concept.
HS2 phase two legislation has also been delayed in order to “take full account” of NPR.
Tory MP for Thirsk and Malton Kevin Hollinrake, who led demands earlier this year from 82 parliamentarians for NPR to be completed in 2032/3 at the same time as HS2, said: “This remains our position and we will do all we can to make sure that vital east-west route is given equal priority.”
Labour MP for Hull North Diana Johnson said: “There seems little prospect of a high-speed ‘Hullapool’ link across the Pennines from Hull to Liverpool under Chris Grayling, and east of Leeds seems a particular blind spot for this Government.”
Leeds City Council leader Judith Blake, who leads on transport for the West Yorkshire Combined Authority called for “swift progress” in transport investment across the North.
She added: “We are working with TfN and the Department of Transport to ensure the benefits of this investment are delivered as quickly as possible including the parallel construction of HS2 phase 2b eastern and western routes and a new line connecting Manchester to Leeds and York with a Bradford city centre station as part of the Northern Powerhouse Rail network.”
Shadow Transport Secretary Andy McDonald said: “The whole of the North has suffered chronic under-investment in transport so it’s important the entire region receives a boost in investment.”
But ResPublica think-tank boss Phillip Blond, who has proposed an HS2 link to Liverpool to be half-funded locally, said it was “very good news”.
A Government spokesman said: “We remain fully supportive of plans for Northern Powerhouse Rail, which is why we backed local leaders with an additional £37m to create the best possible case. We look forward to receiving their proposals.
“Decisions on next steps will be taken after we have received the business case. This will help ensure we take the right approach for northern transport – so that all northerners can benefit from our record investment.”