Prime Minister John Key has confirmed that Government will back a city rail loop in Auckland, but will delay the start of construction by five years.
Mr Key also suggested the $2.86 billion project could be paid for with proceeds from asset sales.
He told media this afternoon: "The Government is prepared to back the building of the central business rail loop in Auckland.
"We want to do that on a slower scale than the one preferred by the council. That is we're likely to start the project in 2020."
Auckland Council wants the construction to begin in 2015/16.
Mr Key said: "The advice we've had is that a 2020 start date is more in line with the likely best-use of that [project].
"We think it reflects more accurately the demand flow that will come for the rail link."
He would not comment on whether Government would pay half of the cost of construction, but said it was not realistic for Aucklanders to pay for the project themselves.
He said that if there were significant bottlenecks in Auckland it led to higher costs for all New Zealanders.
"The reality is that Auckland is experiencing a lot of internal and external migration so ultimately we need to build more infrastructure."
Mr Key would not rule out using the Future Investment Fund - which holds proceeds from the partial sale of energy companies - to fund the rail link.
Asked whether it was a U-Turn, he said Government had never ruled out a rail link.
"We have had concerns about its patronage... We're becoming more comfortable as we get more advice."
Auckland Mayor Len Brown said he was delighted the Government had agreed to support the project.
"The government has now given us a huge challenge to respond to. Along with the electrification of rail, the CRL will be the biggest advance in Auckland transport since the Harbour Bridge.
"Building the CRL is my number one priority as Mayor. It will be a vital piece of infrastructure for Auckland's economy, and will enable us to better meet the challenges of a growing city.
Brown said widespread support for the rail link from Aucklanders had prompted Government investment in the project.
"I want to acknowledge Aucklanders for being very clear in their support for this project."
A spokesman for Mayor Brown said Government was expected to pay half of the project's estimated $2.86 billion price. The rest would be funded by Auckland Council.
Transport Minister Gerry Brownlee hinted this morning that a major transport announcement, related to the rail link project, would be made in the city this Friday.
"The Government is going to make, through the Prime Minister, announcements around a number of issues on Friday in Auckland."
Asked if this signalled a change of heart by Government, he said: "It's not a U-turn, it's a loop."
Government has previously been sceptical about the merits of a 3.5km rail line in central Auckland, which was expected to cost more than $2 billion.
The last time Mr Brownlee was questioned about the project in Parliament in March, he said: "We are in discussions with Auckland Transport and Auckland Council on what are the best options for them moving forward. What we do know is that even if the rail loop were to be built, by 2030 the congestion situation in Auckland would be no better than it is now."
The minister told Parliament the rail project would have a "minimal effect" on the number of cars on the road in Auckland.
He added: "This is a $2.4 billion project, in today's terms, for a relatively short piece of rail for very modest gains."
When asked about his previous comments this morning, Mr Brownlee said Government has always wanted to talk to Auckland Council about its transport needs.
"I don't think we've been unenthusiastic."
Auckland Mayor Len Brown has pushed the project, with light rail a major part of his election campaign.
Auckland Council approved the project in May 2012. But central Government would have to pay for half of its construction, and it has been reluctant to make this commitment.
The Green Party launched a campaign in April to encourage Government to help fund the rail link.
The project would extend the rail line from Britomart and include stations at Newton, Karangahape Rd and Aotea Square. It would require two underground tunnels up to 42 metres under the city centre.
An Auckland Council feasibility study said 3300 passengers could use the station during rush-hour, with K Rd station taking 5500 passengers and Aotea Square 12,000 passengers.
Mr Key's announcement will take place at the Auckland Chamber of Commerce, which has been a strong advocate for the rail link.
Labour's Auckland Issues spokesman Phil Twyford said that if the rail loop was paid for by asset sales money it would be "a bitter pill to swallow" because many Aucklanders opposed the sales.
"John Key is the first man in history to do a U-turn on a train. It's good to see they've finally come round on Labour policy."
Mr Twyford did not know how much of the project's estimated $2.4 billion price tag the Government would pay.
"The devil may be in the details."
Labour's policy is to fund 50 per cent of the rail link, with Auckland ratepayers picking up the rest of the cost.
Green Party transport spokeswoman Julie-Anne Genter said it was good that National had acknowledged rail was essential for Auckland.
She remained wary of the Government's plans until the full details were released.
"How it will be funded and what they're planning remains to be seen."
She said that if the City Rail Link was privately financed, it could end up costing Government more and leading to higher fares for commuters.
The Greens wanted Government to fund 60 per cent of the total cost of the project, more than the proposed 50 per cent.
- additional reporting Hayden Donnell