Canterbury's settlers faced a geographical problem from their first day ashore. The deep-water harbor at Lyttelton sat on one side of the Port Hills; the flat plains where they intended to build their city lay on the other. People and goods had two options: hike over the Bridle Path, a rugged track across the hills, or sail around via Sumner Bar and up the Heathcote or Avon rivers. Neither was efficient. Captain Joseph Thomas considered a tunnel as early as 1849 but lacked both funds and workforce. Superintendent William Sefton Moorhouse revived the scheme in 1858, persuading the Provincial Council to set aside four thousand pounds for engineering studies. Consulting engineer George Robert Stephenson endorsed what became known as the 'Bray route' - shorter, cheaper to build and maintain than the alternative through Gollans Bay. The commission adopted his recommendation and began seeking contractors.

English contractors John Smith and George Knight dispatched a chief miner and twelve men to Canterbury in late 1859. They drove trial shafts at each end of the tunnel and hit a problem: the rock was far harder than the samples sent to London had suggested. Smith and Knight demanded an additional thirty thousand pounds. When it emerged they were in severe financial difficulty, the Canterbury Government severed the contract. Work restarted under new arrangements on 17 July 1861, progressing from both ends simultaneously. The rate depended entirely on what the drills encountered - sometimes volcanic basalt, sometimes softer sedimentary layers. After nearly six years, the breakthrough came on 28 May 1867. Temporary rails were laid by mid-November, and the first locomotive, No. 3, passed through the tunnel on the night of 18 November. Goods trains followed a week later, driven by Abraham Beverley. Passenger services began on 9 December 1867. The tunnel would not be considered truly 'complete' until June 1874, by which time an additional twenty thousand pounds had been spent on finishing works.

Steam locomotives filling the tunnel with choking smoke became an immediate nuisance. In 1909, the Railways Department converted locomotive WF 433 to burn oil instead of coal, then used it to haul 450-ton goods trains through the bore as a trial. The modification worked but cost too much to scale. The real solution came after the successful electrification of the Otira Tunnel in 1923. Because the Lyttelton tunnel had originally been built to accommodate Canterbury's broader gauge rolling stock, the bore was already large enough for overhead catenary wires without modification - an unintended stroke of luck. The first electric train ran from Christchurch to Lyttelton on 14 February 1929. Electrification lasted four decades, until the EC class locomotives reached the end of their service lives in 1970. By then, diesel had taken over, and the opening of the Lyttelton Road Tunnel in 1964 had shifted most passenger traffic to the road. Today, six scheduled freight services pass through the tunnel daily, carrying cargo including coal from the West Coast.

New Zealand's early railway history is tangled by gauge disputes, and the Lyttelton tunnel sat at the heart of one. Canterbury's provincial railways used a broader gauge than the national standard adopted later by the colonial government. The Canterbury Gauge Act permitted a third rail to be laid between the existing tracks, allowing narrow-gauge rolling stock to share the line. Rather than endure this awkward compromise, the provincial government built an entirely new narrow-gauge line from Addington to Lyttelton alongside the original. The narrow-gauge track reached Christchurch on 7 March 1876 and Lyttelton thirty-four days later. The tunnel had been built generously enough - thanks to that original broad gauge - to accommodate whatever engineers threw at it next, from dual gauges to electric catenary to modern diesel freight. A piece of infrastructure dismissed as fantasy in 1851 has now operated continuously for over a century and a half.