It would be the first time that train services would come back to Dudley town centre in 50 years.
The tram train would transport thousands of visitors from Dudley Port station, in Tipton, to the site of Dudley's former station at the bottom of Castle Hill, close to Dudley Zoo, Black Country Living Museum and Dudley Canal Trust.
There are also plans in the pipeline to then extend the line further to a stop near Dudley bus station.
The scheme has been unveiled following a deal struck between Dudley Council and Warwick Manufacturing Group, which wants to use it as a pilot to trial the next generation of train trams.
The group will open a multi-storey National Centre For Development of Very Light Rail Technology at the new station. Around 45 people will work at the site, overseeing the pilot service to Dudley Port and developing the technology.
Two new tracks will be laid down on a disused freight line from Dudley Port to the town. One will be used for the passenger service, the second will be used by the group to develop their tram trains.
The group and council have secured support from Centro. The Black Country Living Museum and Dudley Zoo have also backed the plan.
Councillor Khurshid Ahmed, Dudley Council's cabinet member for transport, said a business case was being written up for funding from the project. Bids will be made to the Government's Local Growth Fund and the European Union.
Work could start on the scheme next year, with opening of the passenger service planned within five years.
Councillor Ahmed said: "The passenger tram train service would be the jewel in the crown for the continued regeneration of Dudley.
"It would bring huge potential for the town, bringing in millions of new visitors who currently face difficulty getting to the town and its attractions.
"Thirty seven million people visit Birmingham each year, with 70 per cent coming in on train - we need a easy link for those people into Dudley."
He added: "The scheme depends on funding, but we are confident this will happen.
"We have received enthusiastic support from groups across the country and in the borough. This has been a long-time in the making, but now we feel we are now at a stage to announce it."
The Warwick Manufacturing Group won funding last year to kick-start its project developing a light rail service from the Stourbridge Shuttle, which has operated between Stourbridge Junction and Stourbridge town centre since 2009.
Councillor Ahmed said the scheme would not stop plans for an extension of the Metro Midland service through Dudley and to Brierley Hill.
He said: "This is something separate from the Metro Midland aspirations, but will not get in the way of it."