Revised plans for a $160 million guided bus tunnel to Adelaide's CBD will allow city parklands to be restored, the state government says.

Labor promised at the 2014 state election to extend the O-Bahn bus track through a tunnel from Hackney Road in the city’s north-east to priority bus lanes in the CBD.  Rundle Road in the city’s east end will be closed under a revised plan for the project, allowing Rymill Park and Rundle Park to be rejoined.

Transport Minister Stephen Mullighan says the plan will enable more than 3000 square metres of parklands to be restored, creating more space for Fringe Festival events.

“At the moment we’ve got the Garden of Unearthly Delights in Rundle Park and we’ve got the Gluttony festival event in Rymill Park,” he told reporters on Wednesday.

“Having one much larger space will provide a lot of flexibility for event organisers.”

The project would also be the first step in defining plans for a possible tram extension to Adelaide’s inner-east.  About 75 city car-parking spaces will be lost as a result of plans to close Rundle Road but Mr Mullighan said he was confident the project would benefit all commuters.

“If we can take 1000 buses out of that intersection … we are returning several thousand car spaces worth of road space at Hackney Road to now be available for cars,” he said.

“That’s an important benefit for congestion, particularly at this time of year.”

Construction is scheduled to begin in late 2015 and finish in the second half of 2017.