Ride Blue Mountains president David Tritton said the decision is a "significant setback" to plans for a separate cycleway between Katoomba and Little Hartley.

The group has now called for the state and federal governments to "urgently" fund upgrades to make the highway safer for cyclists at key sections.

The last Coalition government, which lost power in May, 2022, had planned an upgrade to construct east and west sections between Katoomba and Lithgow.

There was $2 billion in federal funding allocated to that project, but the money was withdrawn by the Albanese government following an independent strategic review of the Infrastructure Investment Program (IIP).

It was one of 50 projects across the nation to lose its funding, with the Albanese government planning to redirect that money into infrastructure projects it believes to be more meritorious.

The funding cut has been widely slammed by MPs who represent west of the mountains. Member for Calare Andrew Gee has demanded the decision be reversed, while state MLC Sam Farraway, too, has condemned the axing of the project: "The Great Western Highway wasn't a fantasy," he said.

Leader of the federal Nationals David Littleproud said the project would be brought back if "we win after the next election".

But Blue Mountains MPs, at a federal and state level, both took a swipe at the previous Coalition governments for failing to fund their ambitious plans for the highway - while vowing to continue with improvements themselves in consultation with groups like Ride Blue Mountains.

Blue Mountains MP Trish Doyle said the former NSW Liberal and National Government "failed to allocate funding for their pie-in-the-sky tunnel proposal, so I am not surprised that the 'project' has been canned by the federal government".

"There are many who are unsurprised by this announcement," she said.

"Nevertheless, the NSW Government has 'paused' the project, will continue to improve sections of the Great Western Highway, and will also consult widely with users like Ride Blue Mountains on these and future works."

Federal Macquarie MP Susan Templeman took a similar line, saying: "As I said to (ACM) last week, this decision, while disappointing for some residents, is not surprising given there was never any funding allocated by the Liberals and Nationals for the actual tunnel that they had proposed.

"I have no doubt that, in any work the NSW Government does to improve sections of the Great Western Highway, they would consult widely with users like Ride Blue Mountains to ensure upgrades meet community needs."

The tunnel component of the highway upgrade is marked under the 'central' section of the highway upgrade. It was for a proposed 10.6-kilometre dual carriageway tunnel linking Blackheath to Little Hartley.

The $2b worth of works axed this month were for east and west sections of the road between Katoomba and Lithgow.

Mr Tritton said those cuts ensured the highway environment remained "too dangerous for vulnerable road users with little or no road shoulder in many sections".

"The concept design for the new Upper Mountains cycleway aimed to provide a sealed three metre separated path between Katoomba and Blackheath which incorporated highway gradients and would have eliminated a number of pinch points in the existing Greater Blue Mountains Trail - making it accessible for persons of all abilities and skill as well as suitable for road bikes," he said.

"The now-cancelled highway duplication included 2.5metre road shoulders to protect vulnerable road users, including on-road cyclists."

Mr Tritton said that in addition to funding safety upgrades of legacy sections of the highway, "funding is also required for off-road quality active transport networks to link town centres including delivery of a safe connection between Katoomba and Blackheath which is suitable for pedestrians and cyclists of average fitness and ability".