It will be funded by the taxpayer and with cash raised from a congestion charging scheme.
The package includes £1.5bn from the Department for Transport, £250,000 more than Manchester had asked for in its submission. This will be supplemented by £1.2bn from participating Greater Manchester authorities, which will be clawed-back through the congestion charge.
Detailed proposals from the bid will go back to the 10 Greater Manchester authorities by 27 June. They will then work out whether they can give "full" backing to the scheme.
Six of the 10 Greater Manchester authorities have given conditional backing. Stockport, Trafford and Bury are opposed and Bolton is proposing a referendum to decide.
At present all 10 must back the scheme for it to go ahead, but Manchester City Council is pushing for a two thirds majority of councils to be considered sufficient backing.
The key sticking point is the need for the congestion charge.
Announcing the package to the House of Commons, Kelly said: "Greater Manchester is one of the fastest growing economies in the UK. They identified congestion as a brake to further growth," she said.
A source within Greater Manchester Passenger Transport Authority (GMPTA) admitted that Manchester's roads did not yet suffer from significant congestion, although forecasts suggested this would change.
"We are trying to get ahead of the curve on this," he said.
Research commissioned by Association of Greater Manchester Authorities AGMA suggests that future growth would be impeded without limiting congestion. Leader of AGMA Lord Smith said up to one in seven new jobs could be threatened.
But shadow transport secretary Theresa Villiers said motorists in Manchester were being forced into accepting congestion charging.
"The government is telling Manchester – if you say 'yes' to congestion charging, then you get your money for new transportation, but if you say 'no', you do not. This is bullying."
She also said people may struggle to pay the costs for the charge. "These proposals could cost £1,200, eight per cent of the income of someone earning £15,000 per year.
She also questioned whether the scheme could raise the £1.2bn it needs from the charge. "In London the net profit since inception [of the congestion charge] has been only £10M [since February 2003]."
What Manchester will get
- 35km of new Metrolink tramways, including new links to Manchester Airport, East Didsbury, Ashton under Lyne and Trafford Park.
- Thameslink-style platform extensions for local train platforms, to accommodate extra carriages.
- Park and ride facilities at tram and train stations
- Eight transport interchanges
- New cycle routes
- Expanded bus network
Manchester City council leader, Sir Richard Leese
"When we put the submission to the government, it was for £1.2bn, but what Ruth awarded is £1.5bn, a 25% increase in what we bid for. We will continue to extend the Metrolink light rail scheme, and could extend the scheme in the future, for example to Stockport. There will be longer platforms and stations for trains.
"The congestion charge will not come into play until the improvements are there. Boundaries are the M60 and intermediate ring-road. We estimate that less than 20% will use it, and the average charge will be Ł3, based on current transport behaviour. Costs will be offset by savings in journey times.
"Access to labour and skills is a key element of our future growth plan and is also a vital factor in enabling existing businesses to grow and attracting new ones to Manchester.
"Congestion reduces the size and availability of labour markets to employers and that means additional business costs
We are going to consult for the biggest improvement to public transport in the city ever."