The World Bank has approved a pilot plan for a canal linking the Red Sea to the rapidly shrinking Dead Sea, Israeli Development Minister Sylvan Shalom announced on Saturday.
Israeli public radio said the bank will provide $1.25 billion in finance for the project.
The initial proposal is for a 180 kilometre (110 miles) channel to transport 200 cubic metres of water, of which half would gush into the Dead Sea and half would feed a giant desalination plant jointly run by Israel, Jordan and the Palestinian Authority, Shalom's ministry said.
The next stage would see the construction of a canal to supply water to maintain and increase water levels in the Dead Sea, which is on course to dry out completely by 2050 if nothing is done.
Shalom, who met World Bank president Robert Zoellick in Washington on Friday, said approval from the global institution was a "spectacular" development aimed at relaunching the project.
The idea of a link between the Red Sea and the Dead Sea, the lowest point on the planet, was first mooted several years ago and in December 2006 representatives from Jordan, Israel and the Palestinian Authority ordered a feasibility study.
Progressed has been slow because of the stalling of the Middle East peace process.
The level of the Dead Sea, a natural site of prime historic and economic importance, has been falling by a metre (three feet) every year, creating major environmental problems.