Prime Minister John Key said this afternoon that the funding would help link up existing cycleways in Central Otago and other regions.
It was part of a $45 million boost for tourism in the Budget, as high numbers of arrivals create new opportunities for development but also put pressure on infrastructure.
Mr Key said the national cycleway helped to attract "high-value" visitors and encouraged them to stay in New Zealand for longer.
Around half of the $25 million will be used to link four existing cycle trails in Central Otago - the Queenstown Trail, the Otago Central Rail Trail, the Roxburgh Gorge Trail and the Clutha Gold Trail. Once completed, it will be a continuous 536km trail.
Speaking at a function at the Carrick Vineyard today, Mr John Key credited Sir Eion Edgar, of Queenstown, with getting the government involved in the expansion.
Other regions would be able to apply for funding to link up or expand their own cycle trails, Mr Key said.
To date, $60 million has been invested in the New Zealand Cycle Trail.
