Prime Minister Benjamin Netanyahu told his cabinet the idea of ships dropping off goods in one port to be picked up by a second ship at the other, had stirred "great interest" from major exporters India and China.
The project has yet to receive final approval or secure funding. Israel has not issued any cargo volume projections for the proposed electrified railway that would run 350 kilometers (220 miles) from Eilat, on the Red Sea, to Ashdod, on the Mediterranean some 30 kilometers south of Tel Aviv.
"Laying this line thus has strategic importance, both national and international," Netanyahu said in public remarks at the opening of a cabinet discussion on the project.
Israeli officials rebuffed any suggestion the railway plan came in response to political turmoil in Egypt and the rise of Islamist parties, though Israel has quietly been preparing for the possible erosion of its landmark peace accord with the neighboring Arab power.
One official told Reuters the railway was a safeguard against the Suez proving incapable of handling surging maritime trade. The canal handled 8 percent of global seaborne traffic in 2009, Egyptian authorities say.
"There is going to be a lot of pressure on the Suez, and the idea here is to find an insurance should the canal not be able to deal with the volume," the official said.
Asked if the Israeli project might bite into Egyptian revenues from tariffs to sail the Suez, the official said: "We do not in any way intend to do anything of the sort."
Samech Nabil, consul-general for the Egyptian embassy in Israel, said it would be premature to comment on the planned rail link, given the project's preliminary nature.
"I think this is purely an internal issue," Nabil told Reuters.
A year after an Egyptian uprising that toppled US-aligned President Hosni Mubarak, Israelis fret at the rise of Islamist politicians in Cairo who firmly back the Palestinians and resent ties with the Jewish state.
Both countries have sought to play down any threat to their landmark 1979 peace accord in public and Israeli ships - including naval vessels - have continued to sail through the canal.
Oded Eran, a retired Israeli diplomat who is now senior research fellow at Tel Aviv University's Institute for National Security Studies, said global traders were increasingly looking at overland transport alternatives to sea routes.
"Going through Suez costs a lot of money in demurrage," he said, describing the time-consuming process of ships obtaining permission to enter the canal and transiting.
Israeli media projected the train line would cost around $2 billion to build. Its Transport Ministry said it was seeking a Chinese company to build it and estimated it would take up to five years to complete.
Israel is heavily dependent on imports, especially for energy, and is wary of any potential threat to supplies. It launched the 1967 war after Egypt blockaded the Strait of Tiran between Egypt and Saudi Arabia, cutting off Eilat.
Eran doubted Egypt would again threaten Israeli shipping, and said he believed assurances by the Netanyahu government that the railway would be primarily a commercial, rather than a security, asset.
Israeli officials linked the project to wider efforts to vitalize Israel's southern desert regions, including a pipeline between Eilat and Ashdod which is envisaged will pump natural gas from Mediterranean platforms for export through the Red Sea.