The Victorian Government has confirmed the planned multi-billion-dollar Metro Rail tunnel will be built under Swanston Street, a plan the previous government warned would split Melbourne in two.

The proposed metro project includes five new underground stations at Arden, Parkville, CBD North, CBD South and Domain, connected by nine kilometres of underground rail tunnels.

The project, which includes five new railway stations in the city, is expected to cost up to $11 billion, with major construction to start in 2018.

It is due to be finished by 2026.

The announcement comes a day after the contracts for the controversial East West Link tunnel were scrapped.

Premier Daniel Andrews told 774 ABC Melbourne the Government considered a range of options for the alignment of the rail project.

Key points: Tunnel will be built under Swanston Street

Tunnel will be built under Swanston Street Expected cost is up to $11 billion

Expected cost is up to $11 billion Major construction to begin in 2018

Major construction to begin in 2018 The project includes five new underground stations

The project includes five new underground stations Disruptions to Swanston Street could last for "some years"

"We have decided that the Swanston Street alignment is the most cost-effective and allows you to deliver the project not at a depth of 40 metres but at a depth of around 10," he said.

"It means we will go over the City Loop and over the CityLink tunnels."

The previous government criticised the plan to build under Swanston Street, comparing the disruption caused by the construction to the Berlin Wall.

Mr Andrews confirmed the project would result in major disruptions.

"There'll be some years where Swanston Street will be significantly disrupted and we'll have to put alternative tram routes in place," he said.

He said CBD traders who were affected by the road closure could be compensated.

"We will absolutely treat people fairly. Everyone impacted by this will be treated fairly and appropriately," he said.

"If compensation is recommended to us, that we need to entertain those ideas, we will look at them in a balanced way."

Part of the tunnel will run under the Yarra River, involving complicated geotechnical work.

Public Transport Minister Jacinta Allan said it was not clear yet how deep the tunnel would need to go underneath the river.

"The topography along the route changes, it's not a consistent depth all the way along," she said.

"This is why we're getting the best advice from the engineers.

"They're telling us the best way to put in the Melbourne Metro tunnel is to go over the city loop tunnels, over the CityLink tunnels and under the Yarra."

The Government said the full cost-benefit analysis and business case for the project would be released once it was completed.

Andrews concedes federal funds will not go to Metro Rail

Sorry, this video has expired A Victoria Government video of the proposed Metro Rail project

Mr Andrews said he conceded the Federal Government would not contribute any funding to the Melbourne Metro.

The original funding plan for the $11 billion project would have seen a three-way split between the State Government, Commonwealth and the private sector.

Mr Andrews said the current Federal Government had made it clear it would not fund Melbourne Metro.

"I see no point in continuing that argument with the current Federal Government," he said.

"But perhaps the people who start this project won't be there to see it finish.

"I don't know who the federal government will be at the end of this project and I remain hopeful that maybe a different federal government at a different time will have a different set of priorities."

Mr Andrews said he would continue to have discussion with Prime Minister Tony Abbott about potential road projects the commonwealth could partner with Victoria on.

"There may be other road projects, for instance the Western Ring Road which was shelved by the previous government," he said.

The planned rail tunnel will be built at a depth of 10 metres taking over the top of the City Loop. ( ABC News: Alison Savage )

"We haven't finalised those matters, they're going to be finalised.

"I take the Prime Minister at his word - he says he wants to have a positive conversation and I'm really confident that we can have that discussion."

The Commonwealth had already given Victoria $1.5 billion for the now scrapped East West Link and had promised a further $1.5 billion for the second stage of the project.

Mr Abbott said he was willing to work with Victoria on other projects now that the East West Link is officially off the table.

But he said he did not believe there were any "shovel ready" projects that could be eligible for the federal funds.

"We're happy to talk to the Andrews Government about other projects of national significance. The problem is there is no major project that is ready to go," he said.

"It's all very well to talk about this urban rail project but it can't begin until 2018 at the absolute earliest, that means three years of nothing."

The Premier said he and the and Prime Minister had a "productive" phone conversation on Wednesday after the deal to cancel the East West Link contracts was announced.

The two men met at a dinner in Canberra on Thursday night ahead of Friday's COAG meeting.