The project will increase the ground's capacity to 25,000.
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The two-storey Cameron Tyson Stand on the western side of the ground is to be demolished and replaced with a new six-bay grandstand to complement the extension of the neighbouring Gunns Stand, which is expected to be completed this year.
The new giant stand will provide seating for 5700 people - compared to 1700 in the original stands - and increase seating capacity at the ground to 13,000.
Announcing the project yesterday, Sport and Recreation Minister Jim Cox said the project would bring the State Government's total investment at the stadium to almost $18 million.
"A lot of development has taken place at Aurora Stadium to provide for players and football fans alike and to ensure the future of AFL in Tasmania," Mr Cox said.
"These additional games at Aurora Stadium will provide significant social and economic benefits to Tasmania and reinforce Aurora Stadium as a genuine and fixed AFL venue."
Tenders will be called almost immediately and work is expected to be completed in time for the start of the 2006 AFL season.
Next year is building as a bumper season as Aurora Stadium is set to host possibly three additional AFL matches while the MCG is unavailable due to Commonwealth Games requirements.
This would mean seven AFL regular-season games being played at the venue.
MCG-based AFL clubs Melbourne and Richmond are likely candidates to play the additional games at Aurora Stadium.
Launceston City Council alderman and chairman of the York Park and Inveresk Precinct Authority Robin McKendrick said the development would be a key plank in attracting more international and national events to the stadium.
"This new development will enable the council to work more effectively with the State Government in attracting more national and international sporting and entertainment events to Aurora Stadium increasing the use of the facility and building on the State Government's investment," he said.