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The new limit, down from 50kmh, will cover all 600m of George St ( which is part of State Highway 88) from near Wickcliffe Tce to the Beach St rail crossing.
It will take effect from October 23.
Several technical reports and assessments were carried out before the New Zealand Transport Agency confirmed the change.
"For some time there has been strong community support in Port Chalmers for a lower highway speed limit through the town, which was supported by the Dunedin City Council, Automobile Association and New Zealand Police," transport agency regional relationships director Jim Harland said.
"We knew many local people were concerned about increasing traffic volumes and vehicle speeds in their town."
The agency received 220 submissions about the proposed change. People who provided feedback were worried about large trucks using the highway and increased traffic volumes, which meant some elderly people and children found it difficult to cross the road.
Submitters were also worried about the safety of cruise ship passengers who used the town's main street.
Mr Harland said several submitters advocated strongly for a 30kmh speed limit.
The road environment and a count of pedestrians during a 24-hour period did not support the need for this, he said.
The agency had to take into account that the highway is a key road freight route to a major port. Parts of the community were also keen to retain parking and were opposed to raised concrete platforms that would have been needed to encourage compliance with a 30kmh limit.
"A 30kmh limit is designed for places where traffic and people can safely mingle in a calm, low-speed traffic environment. To create this in Port Chalmers would require considerable engineering work such as reallocating road space, removing some parks and installing kerb build-outs," Mr Harland said.
"These changes would significantly alter the look and feel of the current highway, and compromise the many activities it supports, including providing a critical road freight link to the local port.
"We acknowledge some people will be disappointed at this decision, but a new 40kmh is safer than the current 50kmh."