Sydney's stretched rail network could carry up to 40 per cent more passengers if its old signalling system was modernised to allow more services, Sydney Trains' chief executive says.

With the rail system under pressure from record growth in passengers, Howard Collins said a digital upgrade of the signalling system at a cost of about $3 billion would be the "biggest improvement we can make to the capacity of this city in a very short space of time".

Stations such as Town Hall in Sydney's CBD are under pressure from a surge in rail passengers. Credit:AAP

Mr Collins, a former head of London Underground, said digital signalling would prove to be a "great return on relatively cheap investment", because it would boost the rail network's capacity by 30 to 40 per cent by allowing more frequent services.

"That is how the Tube got its greater capacity – it went from 3 million to 5 million people," he said.