It is scheduled to be constructed in 2009.

Federal Treasurer Peter Costello announced $265 million for the project at the 42nd annual Victorian Liberal Party Conference in Ballarat earlier this month.

The project has been the subject of intense lobbying for a decade.

Deer Park is a suburb on Melbourne's western fringe, and has been the centre of traffic congestion that has cost millions of dollars in delays for cars and trucks travelling between South Australia, Western Victoria and Melbourne.

Mr Costello said the funding, originally targeted for the construction of the Scoresby Freeway, would be diverted to the construction of the Deer Park bypass instead.

"It will get rid of one of the congestion points which is hampering both commuting and economic development," he said.

"What people should read into it is that the Deer Park (bypass) will be built much earlier than anticipated."

Moorabool Shire Council mayor and Western Highway Action Group member, Peter Russell, said Daylesford was an important part of the Western Highway corridor.

"Daylesford will receive immense benefits," he said.

"It will be easier to access. Many people will use the highway and travel on to great destinations such as Daylesford and Hepburn."

Cr Russell said the bypass would put all western communities 15 minutes closer to Melbourne.

Daylesford is currently about one-and-a-half hours from Melbourne.

"Travel costs will be reduced," he said.

"Many Melbourne people will look at what the western region has to offer. They will look at lifestyle and residential living."

The Deer Park bypass would also reduce accidents, according to experts.

"It will be a safe and secure bypass. Travelling will be much safer," Cr Russell said.

Hepburn Shire Council mayor, Michael Cheshire, said council was a paid-up member of the Western Highway Action Group and congratulated the Federal Government on the decision.

Council's manager of tourism and recreation, Geoff Ryan, said the region would be more desirable to come to.

"The region has always been a short trip away (from Melbourne)," he said.

"This will bring it a little bit closer. With time and the price of petrol it's a great thing."