The extension of the 253-km railway line costing about 13.3 billion yuan will take four years to complete.
The extension from Lhasa to Xigaze, is the first extension of the Qinghai-Tibet Railway, which opened in Jul 2006 raising concerns in India as it also provided speedier and easier access to Chinese military to move its troops.
China also backed the extensive rail link with network of roads and five airport in the remote region, called roof of the world.
"It will play a vital role in boosting tourism in the southwestern part of Tibet and promoting the rational use of resources along the line," said Liu Zhijun, minister of railways.
The Qinghai-Tibet Railway is the world's highest railway. Some 960km of its tracks are located 4,000 meters above sea level.
About 550km of the tracks run on frozen earth, the longest of any of the world's plateau railways.