The government Thursday approved an ambitious project that will help ships to avoid going around Sri Lanka while linking southwest and southeast India.

The long-awaited although controversial Sethusamudram Ship Canal Project will cut down shipping time by 36 hours and 640 km.

"It is a 100 year-old dream of the people of Tamil Nadu and will open a new shipping channel," Finance Minister P. Chidambaram said after the Cabinet Committee on Economic Affairs gave its nod.

The project, which will create a channel similar to the Suez and Panama canals, will cost Rs.24.27 billion ($558 million), including a capital cost of Rs.22.33 billion and a financing cost of Rs.1.94 billion.

Chidambaram said a Sethusamudram Corp Ltd would act as the special purpose vehicle (SPV) for funding the project.

While terming the returns from the project as "satisfactory", Chidambaram said the externalities in terms of defence and security and anti-smuggling operations were greater than the returns.

He ruled out possible environmental hazards due to the project.

The project will create a navigable channel through the Gulf of Mannar and Palk Strait, in the process connecting the Arabian Sea and the Bay of Bengal.

Since the Gulf of Mannar is narrow and shallow, ships from the Arabian Sea on India's west coast have to go around Sri Lanka to reach its eastern ports along the Bay of Bengal.

India cleared the project first in 1955. Three official committees studied it in 1955, 1983 and 1996.

Prime Minister Manmohan Singh's coalition government approved the canal again in 2004.

Sri Lankan authorities have been apprehensive that the canal might harm the country's interests as it could take away shipping form Colombo's main port.

--Indo-Asian News Service