The Milton-Ulladulla Bypass will be the first project funded as part of the Morrison Government's $500 million commitment to the Princes Highway in NSW.
In a statement, the government said the bypass would significantly reduce travel time, particularly in holiday periods, by removing the need for vehicles to pass through 20 separate intersections.
It will also dramatically increase road safety after nearly 100 crashes were recorded in the existing highway corridor through Milton and Ulladulla in a five-year period to 2017.
Prime Minister Scott Morrison said his government would provide up to $400 million to the bypass project to help get local motorists and freight operators home sooner and safer.
"Our record and our plan is focused on backing upgrades which improve our major highways and local roads," Mr Morrison said.
"Milton and Ulladulla residents, transport operators and tourists deserve a safe and Princes Highway and they shouldn't be stuck in traffic on clogged local streets.
"This upgrade will create a better and more reliable highway for all users and builds on our commitment further north to invest $155 million in a new bridge across the Shoalhaven River in Nowra."
Deputy Prime Minister and Minister for Infrastructure, Transport and Regional Development Michael McCormack said the Princes Highway was the main street through Milton and Ulladulla.
"Removing traffic from these growing south coast centres will improve amenity as well as safety for pedestrians and other road users," said Mr McCormack.
Liberal candidate for Gilmore Warren Mundine said the Morrison government's commitment to the bypass would boost the capacity of the region's tourism industry and ensure product continues to be delivered to market at one of the busiest times of the year.
"It is estimated that vehicles travelling along the highway during the Christmas holiday period can average as little as 14 kilometres per hour," Mr Mundine said.
"In addition, studies have shown that the local road network in this area has insufficient capacity to cater for traffic growth over the next 10 years.
"The only way we will improve travel times and safety, as well as releasing the handbrake on the local economy, is to construct this bypass."
The Nationals Candidate for Gilmore Katrina Hodgkinson said during the peak holiday periods, traffic can queue back for kilometres on the approaches to these towns.
"When you look at an electorate like Gilmore, roads and infrastructure are absolutely integral to making sure that the area continues to thrive safely," said Ms Hodgkinson.
"And improving the Princes Highway has got to be the number one issue."