Greater Manchester is to receive hundreds of millions of pounds to develop the UK’s first tram-train network, the transport secretary, Chris Grayling, has promised.

The region already has the largest tram network in the country, Metrolink, but Grayling wants to buy a fleet of trams that can also run on the railways, extending the service out to Wigan, Stockport and Bolton.

Tram-trains are common in Germany, France and Holland and can run on existing rail lines as well as on the street. They are a lot cheaper than building new railway lines.

The nascent Greater Manchester plan follows a pilot in South Yorkshire, which was delivered three years late and cost £75m, five times its original budget. In October, tram-trains finally began running on a small section of the Supertram network between Sheffield and Rotherham in South Yorkshire.

Grayling said he and Network Rail saw tram-trains as part of the solution to chronic capacity problems in central Manchester.

During a meeting with Andy Burnham, the mayor of Greater Manchester, on Friday, the transport secretary said: “There is several hundred million pounds set aside for the centre of Manchester in the next few years to ease capacity problems and I want to make sure we spend that in the best possible way.”

Burnham, who spent much of last year lambasting Grayling for failing to get a grip on the summer timetabling chaos on the railways, said he was “really encouraged” by the minister’s intervention. Tram-trains “could take this city to that London-style, world-class transport system”, he said.

Burnham said Network Rail was working on a report on how best to solve capacity issues in Manchester. “ If that says tram-train is the best option to progress quickly, I would hope it could be a matter of a few years to see the first tram-train vehicles in Greater Manchester. Three to five years possibly, as soon as that.”

He said he had not yet been given any money towards the project. “We haven’t had a cheque from him or anything like that, but when the government comes out and says something like this, they don’t do so lightly, so I am very encouraged by what the secretary of state has had to say.”

Grayling defended the price rises inflicted on railway passengers in the new year despite scant improvement in services, particularly in the north of England. He said forcing private rail companies rather than passengers to shoulder the increasing costs of running a railway could put the companies in financial difficulties.

“The first thing on rising fares: they are driven by rising costs,” he said. “The experience of fare freezes – as opposed to compensation packages – you can see in London. Look at the finances of Transport for London [TfL] – after a series of fare freezes, they are in deep difficulty.”

This year TfL faces a £1bn funding deficit after the government axed a grant worth £700m a year.