Extension would link Midland Metro Line One to Birmingham New Street Station.
The £127.1 million Midland Metro scheme has been given initial approval by the Department for Transport (DfT).
The scheme, an extension to the existing system, would link the existing Midland Metro Line One to Birmingham New Street Station and deliver improvements to the tram carriages.
The Government has indicated that it is willing to provide funding up to £81 million towards the cost of the scheme subject to some additional work being undertaken by the promoter in the short term.
Transport Minister Chris Mole said: "This is good news for the people of West Midlands. An efficient and reliable transport system is critical to any city."
"Not only will this scheme help to support the ongoing regeneration in central Birmingham it will also benefit the wider West Midlands region."
Department for Transport