Liverpool City Council was awarded £2.8m from the Department for Transport's Local Sustainable Transport Fund, administered in Liverpool by Merseytravel.
The fund aims to reduce the number of journeys made by car, promote sustainable transport, reduce congestion and carbon emissions. It also aims to enhance access to employment and other essential services and improve journey time and reliability.
The city council plans to use £1.5m of the funding to deliver the cycle hire scheme, which would see 1,000 bikes made available for hire across 60 stations, primarily in the city centre. The self-service operation would run 24-hours, seven-days-a-week, with cyclists able to pay using their mobile phone or cash card.
Plans include a number of electric-assist bikes available for hire, as well as points for charging low-carbon vehicles.
Cllr Joe Anderson, mayor of Liverpool, said: "This project would put Liverpool at the forefront of building sustainable transport into everyday city life. With the major increases in the numbers of people living, working and visiting the city centre, we believe the time is right to introduce a cycle hire scheme, to reduce reliance on the car and to offer a low carbon, low cost, healthier way to get around Liverpool."
Cllr Tim Moore, the city council's cabinet member for transport, said: "Liverpool has a low level of bicycle ownership, but recent figures from our Local Transport Plan show that cycling is on the up in this city – so we know there's an appetite for it.
"If we want to reduce congestion and pollution, we need to find creative ways to limit the growth of car journeys and promote sustainable transport. We hope the scheme will help drive up the health and fitness of many more local people by encouraging them to hop on a bike for all their trips around the city."
Following the initial investment, the council hopes the scheme will become financially sustainable after three years. The city council would seek to appoint a cycle hire operator to take the project forward in terms of set up, marketing and operation.
The council hopes to establish links with key tourism sites, educational institutions and major city centre employers over the cycle hire scheme.
Cllr Liam Robinson, chairman of Merseytravel, said: "This project will make a significant contribution to the sustainable transport offer to visitors and residents of Merseyside and supports the objectives of the Local Transport Plan and the Active Travel Strategy."
It is expected that the Liverpool City Cycle Hire Scheme will be launched with 300 bikes in the city centre in summer 2013, and expand to a total of 1,000 bikes over the following 18 months. Stations will be located in the city centre, before being extended to outlying suburbs.
The Liverpool City Cycle Hire Scheme proposals will be considered by the city council's Mayoral Cabinet on Friday 21 December.