Proponents of a heritage train project say the Tasmanian Government's decision on what to do with the disused North East Railway Line is a cop-out.

For years there has been debate about what the old rail corridor should be used for — the Dorset Council wants it ripped up and made into a cycling and pedestrian trail, while the Launceston and North East Railway Group wants it restored and used for tourist heritage rail.

Now the State Government has released its decision on what to do via a treasury report that looked at the feasibility of both proposals.

After finding each had the capacity to generate economic and employment benefits, it offered a compromise, proposing the Scottsdale-Lilydale Falls section of the line for a cycle trail, and the Lilydale-Turners Marsh section for the Launceston and North East Railway Group to gain accreditation and operate a heritage rail service.

Treasurer Peter Gutwein said if the heritage train group successfully completed the Lilydale to Turners Marsh section, the line from Turners Marsh to Coldwater Creek would also be made available to the group.

"This will provide a heritage rail experience over a total of 21.5 kilometres of non-operational line between Coldwater Creek and Lilydale, as well as access to the 52-kilometre TasRail operational line between Launceston and Bell Bay, subject to accreditation and scheduling," he said.

"In terms of cycling, it allows the Dorset Council to continue what they have started with the existing rail trail between Scottsdale and Billycock Hill being extended to Lilydale, providing around 70 kilometres of cycleways in total."

Government's proposed North East Rail Corridor map

Pro-rail group determined to block cyclists' path

North-East Residents and Farmers Association chair Stuart Brice said he was disappointed neither proposal was fully supported.

"It's a little bit of a cop-out," Mr Brice said.

He said the "best part" of the railway line had been given to the council to rip up against farmers' wishes.

"It's not going to be a very friendly cycle trail," he said.

"And there's not going to be pop-up shops that appear to look after them [cyclists], so it's going to be a bit of a lonely trail ride."

Heritage train advocates vowed to continue their fight, saying they would lobby the Legislative Council to block the cycle trail proposal going further.

"And if it isn't stopped there … we still have to go through the planning appeals board," Mr Brice said.

"Both Launceston and Scottsdale have to submit planning applications to change the use of the corridor. The rail people don't because it's already a railway.

"It's not over yet and it's going to be a while before they even get near a shovel."

'It's economic reality versus fantasy'

"It's going to be a lonely ride," says rail advocate Stuart Brice. ( Facebook: Launceston and North East Railway )

The Dorset Council intends to submit development applications to rip up the railway and develop the cycle trail "as soon as possible".

Mayor Greg Howard said heritage train advocates should be "thanking their lucky stars" they've been given an opportunity to set up on a shorter line, which could potentially run into Launceston and pick up tourists.

"This is no longer a matter of what people want; it's a matter of what's achievable," Mr Howard said.

"They can continue to fight but it's a futile exercise; they'll never have the money to bring the train to Scottsdale.

"It's about economic reality versus fantasy."

The Federal Government promised to provide $1.45 million in funding to the cycle trail project in early 2015.

Mr Howard said that funding expired at the end of 2019, so the council hoped the cycle trail would be developed by then.

