A stretch of the Leeds-Liverpool Canal on the Mersey waterfront is to be rebuilt with a £7m government grant.
The waterway was removed when the Liver Building was erected
The waterway between Stanley Docks and the South Docks was lost when the Royal Liver Building was built on the Georges Dock in the early 20th century.
The project received an Objective One European cash grant and will create nearly 200 new jobs.
Deputy Prime Minister John Prescott said the restoration plan was "great news" for the people of Liverpool.
"Over the last decade we have seen a renaissance for our waterways, with increased investment and regeneration work, led by British Waterways, bringing waterway life and a great leisure facility back to the people," he said.
"The Leeds & Liverpool Canal was once the backbone of the northern economy. It is fitting that 100 years on the canal link is being restored as our northern cities rebuild their links and work together as part of our Northern Way initiative.
"The restoration is great news for boaters and for everyone in Liverpool looking forward to the Capital of Culture celebrations in 2008."
When the link is complete boaters will be able to cruise over the Pennines from Leeds to Liverpool and into the city's world-famous South Docks.
The rest of the £17m funding needed has come from the North West Development Agency, British Waterways, and English Partnerships.