The new rail will bring Portugal's historic capital closer to Europe

The 7.7bn euro ($9.2bn; �5.2bn) railway linking Lisbon and Oporto with Spain is scheduled to be ready by 2014.

It is expected to cut the rail journey time between Lisbon and Madrid from 10 hours to less than three hours.

The plan has been scaled down for economic reasons, after years of fierce debate within Portugal and with Spain.

The proposal still has its critics, according to the BBC's Alison Roberts in Lisbon.

Of the five lines planned, only two will be built - a decision which has angered many who had campaigned for a direct link between Oporto and the city of Vigo in the Spanish north-west.

However, some economists had warned the project would not be profitable.

The government argued that the investment had strategic value, eventually binding Portugal to high-speed rail networks across Europe.

Construction would begin in 2008, Public Works Minister Mario Lino said.

Roughly one-third of the Portuguese cost will come from EU funds and the remainder will be drawn from loans from the European Investment Bank, to be repaid once the trains start running.

The project also envisages a new bridge spanning the River Tagus in Lisbon.