A $50,000 study into moving a rail line in Horsham to bypass the city will be completed by the end of this year.
Public Transport Minister Terry Mulder announced on Friday the State Government would contribute $40,000 to the study.
Horsham Rural City Council will contribute $10,000.
Mr Mulder said diverting the Melbourne to Adelaide, Darwin and Perth railway was likely to make the existing route about six kilometres shorter.
"The study will consider the pros and cons of diverting the railway,'' he said."
"Currently Horsham is split in two by the Adelaide line, but it has a centrally-located railway station accessible for passengers on The Overland train, that operates three days a week in each direction between Adelaide, Nhill, Dimboola, Horsham, Stawell, Ararat, Geelong and Melbourne's Southern Cross.''
Mr Mulder said the study would also assist both state and federal governments with the Nation Building Program planning study for the Western Highway, which will consider the possible bypassing of Horsham.
"The Melbourne to Adelaide rail line is a vital link. Rail freight operators such as Pacific National, QR National, El Zorro, SCT, Genesee and Wyoming and the new SBR either haul about 90 per cent of Melbourne to Perth freight or thousands of tonnes of grain a month on part, or all, of this important rail line,'' he said.
"The rail operators work with the Australian Rail Track Corporation to keep further B-doubles off Wimmera roads, assisted by Coalition Government initiatives such as the re-opening of the Dimboola to Rainbow rail line after a decade of neglect under Labor.''
Horsham Rural City Council chief executive Peter Brown said relocating the rail line to north of Horsham would work well with the Wimmera Intermodal Freight Hub now open at Dooen.
"Moving the rail line offers enormous potential for redeveloping the land where the rail line is and connecting with Horsham North,'' he said.
Mr Brown said it made sense to investigate the relocation of the rail line in conjunction with the Western Highway bypass of Horsham.
But he conceded it would be a difficult task to get the state and federal governments and the road and rail networks to work together.
Member for Lowan Hugh Delahunty said the Federal Government's Australian Rail Track Corporation was unlikely to be in an immediate position to fund a rail bypass of Horsham.
"But it is essential the planning work is undertaken so that the ARTC can have access to more detailed information about the feasibility of the exact route,'' he said.
Horsham Mayor Mandi Stewart said the investment from the State Government was great news for the region.
"The study is essential for maintaining viable and sustainable transport in the region and will support future population and industry growth, assisting our local produce grain, pulse and oilseeds growers,'' she said.