The funding will cover the extension of the cycle trail's second and third stages, which will take it through Fairfield, Abbotsford and Green Island.
Ms Upston announced the investment yesterday afternoon, saying it was hoped the trail would boost Otago's tourism stakes.
Ms Upston said the government was looking for projects that were ready to go and would have a significant impact, and the tunnels trail ticked those boxes.
The project also had a lot of support from the Dunedin City Council.
"It was a really easy investment decision to put $2 million into this project."
She wanted to invest in areas with capacity for accommodation, activities and restaurants and had a particular focus on Dunedin and Otago.
Investment down the line in stages four and five of the project was contingent on a variety of factors, including attracting international visitors.
"One of the things we're looking at is we need to ensure that the investment we put in is getting returns.
"First and foremost, let's get Stage 2 and 3 complete. Let's have it massively utilised with visitors. And then we can always have a conversation about the stages 4 and 5."
The majority of the cycle trails funding is from the international visitor levy.
Tunnels Trail Trust chairman Brent Irwing said it was good to have the government on board with the financial support for the next two stages of the trail.
"We're getting a lot of other support now that we've got stage one done."
He believed as the trail grows it will attract more and more people because towns such as Lawrence and Roxburgh were starting to thrive because of cycle trails.
Stage one was close to completion with the Chain Hills Tunnel expected to open in early December.
The trail will be a level one track and mostly flat, so people could easily walk it and the Chain Hills Tunnel is one of the few tunnels in New Zealand to be fully lit.
The project will be co-funded by the DCC, and construction of both stages was expected to be completed by mid-2027.
It follows the near-completion of the initial stage from Wingatui through the Chain Hills Tunnel, a 1.55km length that was funded by the DCC.
The trails are set to span the 15km between Dunedin and Mosgiel, linking the centres through two historic railway tunnels — the Chain Hills Tunnel and the Caversham Tunnel.
They will link to Otago's wider network of Great Rides, including the Otago Central Rail Trail, Clutha Gold Trail, Lake Dunstan Trail, Roxburgh Gorge Trail and Queenstown Trails.
