The rail link will see trains stop at Leven and Cameron Bridge, linking the east of Fife with Edinburgh and Dundee for the first time since 1969.
The news comes after years of campaigning to have the six-mile line re-opened, which will see it join the Fife Circle near Glenrothes with Thornton station, and a freight terminal for whisky at the Cameron Bridge distillery - the largest grain distillery in Europe.
The line originally opened in 1854 but closed to passenger trains 50 years ago and has been mothballed since the last coal trains ran on part of the line to Methil Power Station in 2001. The 33,000-population urban area is the largest in Scotland without a rail line.
The investment will also improve bus services as well as develop new cycling and walking infrastructure, the Scottish Government announced today.
The project will now go forward to the detailed design phase with initial estimates of construction and preparation costs of around £70 million. Transport Secretary Michael Matheson said an additional £5 million will be invested in a Levenmouth Blueprint Fund "to maximise the benefits" of government spending in the area.
Mr Matheson said: “I am extremely pleased that the case has been made for the Levenmouth rail link and I look forward to seeing this project being taken forward to the next stages of design.
“The detailed appraisal work that has been carried out suggests that improved transport links, which give Leven a direct rail link to the capital, will lead to an enhanced local economy, bringing better access to employment and education and the potential for new investment. Easier and more sustainable travel options will make it easier for people to reach hospitals, schools and visit other areas of the country as well as giving better access to Levenmouth.
“I would like to acknowledge the hard work of local MSPs, elected members and interest groups who have campaigned for the reopening of this line and I look forward to working with all partners to realise all of the benefits that improved connectivity can bring.”
Jenny Gilruth, the SNP Mid Fife and Glenrothes MSP, who held a Holyrood debate on the need for the line to be reopened, said: “This announcement has the potential to change lives and give the Levenmouth area a new lease of life. It will bring jobs, it will bring investment and it will create huge opportunities for future generations.
"I’m absolutely thrilled that the project has been given the green light by the Scottish Government. There will be lasting benefits for people across my constituency and beyond for years to come. Convenient, green transport links are essential for our future economy but also for getting more people on public transport as we tackle climate change.
"For local residents, for businesses, for visitors, for everyone – the impact the Levenmouth rail will have cannot go understated.”
Fife’s Green MSP Mark Ruskell also welcomed the news and credited the "passionate local campaign who have effectively demonstrated the transformative impact a railway line would have on the local community." He added: “The report published today showed that reconnecting disadvantaged regions like Levenmouth to the rail network will have a big impact across the whole region. There’s also the possibility to use the line for freight and take hundreds of lorries off local roads, and I expect this to be explored more in the next feasibility stage.“This announcement needs to just be the start of a more ambitious plan for expanding the rail network in Scotland. Two years ago I published a report which identified four major projects in Fife that could transform local communities, including Levenmouth. This announcement will give hope to those campaigning in Newburgh, St Andrews and Kincardine that the Scottish Government will look favourably on their asks to rejoin the rail network too.”