About £3.8m will be spent on the transformation of Derby's Cathedral Green, including the construction of a footbridge across the River Derwent.
Other work will include landscaping, lighting and the creation of an events area by the river.
The new Cathedral Green will be ready by April 2008 if the project stays on schedule, a council spokesman said.
Derby Cityscape's Nick Corbett, an urban designer, said: "It is an exciting step forward with work starting on Tuesday to bring about an urban renaissance to the city.
"The footbridge will be a work of art in its own right constructed with traditional materials," he added.
There was a 20-week consultation period before the project started, he said.
About 1,000 residential units are being built within 400m of the green.
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