A £23.4million Stroud District Council-led project to connect Stroud and Stonehouse to the nation's inland waterway network by 2024 has been given a significant vote of confidence by the Heritage Lottery Fund.

Stroud District Council and Cotswold Canals Trust have received crucial initial support from the Heritage Lottery Fund (HLF) which paves the way for the restoration of the derelict canal between Stonehouse and Saul junction.

The HLF picked Stroudwater Navigation Connected as one of just four projects across the country for development funding and the £842,000 announced today will make sure everything is in place before applying for a further £9million of HLF money to allow the whole project to go ahead.

The stretch between Stroud and Stonehouse is almost restored and bringing the remaining four miles back in to use will link it to the Gloucester & Sharpness Canal and the rest of the country, attract huge tourism benefits, create 30 hectares of biodiverse habitat and canal towpath, and attract more than £100million-worth of new private investment within five years of the end of the project.

If the HLF had not chosen the project, it would have been set back by at least a decade.

Doina Cornell, leader of Stroud District Council, said: "That we have secured development funding is absolutely brilliant news. We knew that the bid was very strong but this is a huge relief and it means that working with partners, we can drive the project on and look forward to making Stroud and Stonehouse canal towns once again."

The SDC-led restoration between Stonehouse and Thrupp has transformed the canal corridor, attracting £115million of private investment. Studies suggest that boaters and visitors to a restored canal would spend more than £5million a year in the Stroud district.

Stroud District Council has committed £3million, and contributions from Gloucestershire County Council, Cotswold Canals Trust and the Canal and River Trust are worth around £2million. The total cost of the project, allowing for inflation and other contingencies is £23.4million.

David Drew, MP for Stroud, said: "I'm delighted that the National Lottery has recognised the value of redeveloping the Stroudwater canal's 'missing link.' Connecting the canal to the national waterway network has been a long held vision, will bring economic and social benefits to the whole district and I'm pleased it is a step closer. Congratulations to Stroud District Council and Cotswold Canals Trust for getting us to this point and putting together a strong and successful bid."

Jim White, Cotswold Canals Trust chairman, said: "The Stroud Valleys will become a new, must go to, destination on the national canal network, bringing growth to local businesses through tourism, by increasing the canal and towpath use for recreation."

Under the leadership of Stroud District Council since 2009, the project has seen restoration of 4.5 miles of canal, nine locks, and six miles of towpath so far.

Cllr Cornell said: "Clearly the Heritage Lottery Fund was impressed with the bid and we are grateful for its faith and backing in the project which will bring so many benefits to the area. The whole project fits in well with our priorities as a council to invest in the local economy and the environment, and to promote health and wellbeing."

Punchline said: "We support this project which will attract more visitors to the area and help local businesses thrive. In tough economic times it's good to see that the HLF appreciates the benefits to the economy of doing something a bit different for local residents, businesses and tourists alike."