The Department for Transport is handing over £1m to restore the 1.4 mile long Queensbury Tunnel, which last year made a list of Victorian structures most at risk of being lost.
West Yorkshire Combined Authority can use £500,000 to develop options for how the tunnel could be part of a new green transport link between Bradford and Halifax.
Highways England will receive the remaining funds to look further at the engineering requirements and costs associated with making sure the tunnel, which is at risk of collapsing, is safe for any future construction.
But Bradford council said the price tag to save the tunnel was £27m and that once the business case is complete the Government "still needs to be prepared to find significant funding to pay for works to save this historic national asset".
For several years, campaigners have called for the Queensbury Tunnel to be re-opened as a cycle and pedestrian route.
They say the scheme would encourage cycling between Bradford and Halifax and act as a local tourist attraction.
However, Highways England, which manages the tunnel on behalf of the Department for Transport, has pushed for the tunnel to instead be filled in for safety reasons.
Last month Bradford Council announced that Transport Secretary Grant Shapps had made an offer of £4m to re-open the tunnel, saying it was their “best and final offer”, and that a decision from them would be needed in days.
The authority estimates that the cost of re-opening the tunnel, linking it in with neighbouring infrastructure and maintaining the facility for years to come will cost at least £27m.
Mr Shapps said today: “The Queensbury Tunnel is part of our great railway heritage. Opened in 1878, it was closed in 1956 and has fallen into disrepair.
"So much so that last year the Victorian Society declared it one of its top ten most endangered structures.
"What a shame it would be to see it consigned to history when it could be reborn as part of a green transport route linking Bradford with Halifax, helping to improve connectivity in an environmentally friendly way while being a source of pleasure for generations of cyclists and walkers to come.
“Reviving transport infrastructure in the North is not just about flagship projects like HS2. It’s also about making improvements on a local scale that make a real difference to people’s lives.
"That’s why I’m so happy to confirm this funding which will enable us to see just how the Queensbury Tunnel - an iconic element of the region’s landscape - could be redeveloped as a green transport link.”
Alex Ross-Shaw, Bradford Council’s Portfolio Holder for Regeneration, Planning and Transport, said: “I’m pleased that the Secretary of State has extended this lifeline for Queensbury Tunnel.
"We look forward to a more detailed conversation with government about how far this £1m will stretch to maintain the tunnel and do further feasibility work.
"It’s a testament to the hard work of so many volunteers and members of the public to raise awareness of this once in a generation opportunity so it’s important we seize it with both hands.
“All we’ve ever wanted has been a good partnership with Government to be able to save the tunnel.
"£1 million isn’t a significant amount of money when you consider that the current price tag for saving the tunnel is £27 million.
"When the £1 million is spent and the business case complete, the Government still need to be prepared to find significant funding to pay for works to save this historic national asset.
"Nevertheless the news today is welcome and gives us hope that Government may be interested in working with us to deliver a financially sustainable future for the tunnel.”
Norah McWilliam, leader of the Queensbury Tunnel Society, said: “We’re obviously delighted that the Minister has once again recognised the considerable potential of Queensbury Tunnel as part of an active travel link between Bradford and Calderdale, and committed funding to demonstrate the viability of delivering it.
“It’s another important step towards a positive outcome for this historic piece of the region’s industrial heritage."