Turkey plans to build a new waterway to bypass the heavily congested Bosphorus Strait.
Prime Minister Recep Tayyip Erdogan said that "Canal Istanbul" will link the Black Sea to the Sea of Marmara that opens to the Aegean Sea.
He announced the scheme during campaigning ahead of parliamentary elections on 12 June.
Mr Erdogan said the canal would be some 45-50 km (around 30 miles) long, 150 metres (500 feet) wide at the surface, and have a depth of 25 metres (80 feet), but he did not disclose the exact location or the cost of the gargantuan project.
He said it will be completed by 2023, when Turkey will be celebrating the centenary of the founding of the Turkish republic after the fall of the Ottoman Empire.
"We have today embarked on the greatest project of the century," he said, adding it would be a bigger undertaking than the Panama or Suez canals.
Mr Erdogan said hazardous materials pose a threat to Istanbul while they are being transported through the narrow 30km (19 mile) Bosphorus strait.
The canal to be built on the European side of Istanbul will link the Black Sea with the Marmara Sea, and will be large enough for supertankers up to 300,000 dwt to pass through.
Ships carry 139 million tons of oil, 4 million tons of liquefied petroleum gas and 3 million tons of chemicals through the Bosphorus annually.
Erdogan, a former mayor of Istanbul, also announced plans for a third airport serving the city, with a capacity for 60 million passengers a year.
The value of the projects was not given, but Erdogan said he expected to raise financing easily.
Kemal Kilicdaroglu, leader of the main opposition Republican People's Party (CHP), said it was a scheme to enrich AK Party cronies.
"This country needs men who think and produce, but not crazy men. This project is not about people. It's about making AK Party supporters rich," the CHP leader said.
Having run the country since 2002, Erdogan's AK Party is expected to secure a third term of single party rule, judging by recent opinion polls.