BT is to provide super-fast broadband to up to 90% of homes in Cornwall and the Isles of Scilly, in the biggest rural fibre optic roll-out in the UK to date.
The project, due for completion in 2014, could provide a blueprint for future rural broadband projects.
The £132m funding pot is being shared between BT and the European Union.
The government said it was "a big step" towards its goal of having the best broadband network in Europe by 2015.
BT has been under pressure to help reach the 30% of homes which, under current plans, will not benefit from next-generation broadband services.
The telecoms giant will provide £78m worth of funding, with the European Regional Development Fund contributing around £53m - the largest investment of its kind made by the EU.
Communications minister Ed Vaizey said the project was an important part of the UK broadband puzzle.
"The government wants the UK to have the best broadband network in Europe by 2015, so today's announcement is a big step towards that goal," he said.
Speaking at the launch of the project at Newquay's Fistral beach, Ian Livingston, chief executive of BT, said the project will make the county one of the best connected in the world.
"The final third of the UK is undoubtedly challenging to reach with fibre but this project shows it is possible," he said.
Cornwall Council leader Alec Robertson promised it would "create thousands of new job opportunities".
BT said the project could be replicated in other rural areas of the UK.
"Our door remains open to others who are keen to work with us to bring fibre broadband to their areas," he added.
Mr Livingston said that if take-up was good in Cornwall it would make "better sense economically" to increase BT's fibre footprint to other rural areas.
"We are talking to a number of local authorities, but there is nothing quite as ambitious as what we are seeing in Cornwall," he said.
Only Cornwall and parts of Wales are entitled to EU development funds so other local authorities would have to raise funding by other means.
Andrew Ferguson, editor of broadband news site ThinkBroadband, said it could provide a good model for getting next-generation broadband services to rural areas.
"If take-up is good, it might mean BT does other regions on its own," he said.
BT has come under increasing pressure from rival firms and community broadband initiatives.
Some so-called broadband notspots are funding their own fibre rollouts, frustrated by BT's lack of action.
In Erbistock, near Wrexham, BT told villagers it would cost them £550,000 to get a broadband connection for 80 houses. Rival Rutland Telecom then quoted £50,000, prompting BT to reassess costs and come back with a figure of £100.
Any plans to stimulate rural broadband could also help bring the UK more in line with European ambitions for broadband.
The European Union wants member states to provide citizens with a minimum of 30Mbps broadband by 2020, with all nations offering basic broadband - generally regarded as 2Mbps - for all by 2013.
The UK risks falling foul of this second target because it has decided to delay the rollout of basic 2Mbps broadband to all homes until 2015.
BT has also been criticised for being late to roll out fibre but Mr Livingston defended the firm's strategy.
"We are rolling out fibre to 80,000 homes a week which is the equivalent of fibring the whole of Singapore every quarter," he told BBC News.
He also said that its fibre rollout would play a role in the govermnent's commitment to a minimum 2Mb connection by 2015.
"When you put fibre in, some homes will leap from 1Mbps to 40Mbps. A lot of the answer to 2 megabits minimum will be fibre, " he said.
BT has decided to use a 50:50 mix of fibre-to-the-home technology (FTTH) and the slower fibre-to-the-cabinet technology (FTTC) in Cornwall.
FTTH connects houses and premises to high-speed cables, whilst FTTC still relies on slower copper cables to connect homes to BT street cabinets.
Its use of some FTTH could help win over critics of its current fibre roll-outs.
BT has committed £2.5bn into next-generation broadband, which aims to reach 70% of homes in the UK. Around one quarter of those homes will be connected using the faster FTTH technology.
Other EU countries favour the faster, more future-proofed FTTH technology.
"Changing the ratio of FTTH to FTTC, plus increasing and bringing forward the amount of planned FTTH could have a dramatic effect," said Steve Powell, product manager of Viatel, a business communications firm.
BT may have found new impetus to provide fibre in hard-to-reach areas but not all fibre projects in the UK are faring so well.
The BBC has learned that an ambitious plan to provide cities throughout the UK with fibre via the sewers has hit the buffers.
Wessex Water has pulled out of a pilot project in Bournemouth, saying the financial reward is not good enough for them.
The project, to provide over 80,000 homes with fibre, will now go ahead via the more traditional route of laying cables, with all the associated disruption of digging up roads.
i3, the firm behind the FibreCity projects, said that deals signed with other water firms remained secure.