The 57km line will be extended via a 2km tunnel, adding further costs to the Shekels 7bn ($US 1.8bn) project, which is due to open in 2018.
The aim of the extension project is to improve access to the Western Wall for tourists, students and others, while relieving pressure on the main Jerusalem station.
Journey times between Jerusalem and Tel Aviv will be cut from 1h 18 min to 28 minutes, with trains running at 15-minute intervals.
Plans for the line originally date from 2001 and it was scheduled for completion in 2008. However, due to delays caused by environmental protests, construction of the line was delayed.