The idea was made public for the first time yesterday by Bevan Dodds, on behalf of a trust yet to be formed which will own and operate the event.
Mr Dodds is also the chief executive of Dunedin City Holdings Ltd, the Dunedin City Council's group of trading companies.
He told the annual plan hearing previous heritage rail events in Dunedin had been organised by "a couple of people at the Taieri Gorge Railway", with a limited budget, staff resources and advertising.
Despite that, they had attracted thousands of people to the city.
He had been told by an accommodation provider rail events were better for them than a rugby test.
People had come, on word of mouth, from the United States, Canada and Australia, and stayed longer than for a test.
Visitors for such an event were typically older, better off, and the city benefited from their visit.
Mr Dodds said his plan was to employ a permanent event organiser to promote the event overseas, and attract as many international visitors as possible.
The organiser would be needed from next year, as it would take 18 months of "very hard work" to get the event, to be run every two years from 2012, going.
"The budget will be large, and the event will only be able to proceed with funding support from the council, the Government and local sources."
He said a "rough budget" would be about $750,000.
The idea was to plan, in conjunction with the Taieri Gorge Railway, an event that would attract multiple steam trains, with both long and short train trips.
Every effort would be made to "sell other Dunedin attractions off the main event", such as the Otago Settlers Museum and the Gasworks Museum.
"There would be trains moving in and out constantly, whistles blowing - the whole town would wake up."
Hotels and other accommodation providers were often empty during Labour Weekend, which would be the best time to have it.
Mr Dodds said the feasibility study would be put together and taken to the Government in an attempt to get funding from the same Ministry of Economic Development source that helped fund last year's winter games in Queenstown.
He thought the trust could access that funding, but told the council the event would need the city's financial backing.
"Say no to the $20,000 unless you're willing to get behind it."
If the council put in the $20,000, it needed to "bear in mind it's leading up to a much bigger request".
Mr Dodds said he did not think the event would ever completely cover costs, but if it was successful, it would give Dunedin an extensive profile overseas.