It is one of a dozen towns and cities chosen by Ruth Kelly, the Transport Secretary, to pioneer the project.
The Government funding is intended to encourage another 2.5 million people to take up cycling as a way of improving fitness and easing congestion.
Bristol will be the first city to get a bicycle rental scheme, similar to the Velib system in Paris, where cyclists are able to rent bikes stationed around the city using a special hire card.
Commuters who use bikes will also get access to somewhere to have a shower and get changed before going to work.
Bike parks will be provided along with a series of cycleways from the city suburbs into the centre.
Bristol is one of the cities also considering bringing in pay-as-you-drive road pricing to discourage motorists from coming into the city.
London's new mayor, Boris Johnson, is a keen cyclist and is likely to promote a series of his own initiatives in the capital.
The 11 other cycling towns announced by the Government are: Blackpool, Cambridge, Chester, Colchester, Leighton/Linslade, Shrewsbury, Southend on Sea, Southport with Ainsdale, Stoke, Woking and York.
They will join Aylesbury, Brighton, Darlington, Derby, Exeter and Lancaster, which have been promoting cycling since 2005.
"A quarter of journeys made every day by car are less than two miles," Ruth Kelly said.
"Cycling is an alternative that could bring real health benefits to millions of adults and children, as well as helping them save money and beat congestion.
"The first step in persuading people to leave their cars at home is to offer them a real choice.
"Providing a step change in cycling facilities, dedicated cycle lanes, more training and information will have a big impact on how people choose to travel."
Phillip Darnton, chairman of Cycling England, said Britain had to follow the example of the continent in promoting the use of the bike.
"Beyond well co-ordinated, consistent investment in cycling, and the introduction of policy measures to encourage it, cycling crucially needs determined and persistent high-level leadership."
A leading road safety group warned that other measures would be needed to make cycling work.
"What we need to see is those people currently not cycling beginning to do so," said Rob Gifford, executive director of the Parliamentary Advisory Committee for Transport Safety.
One key factor that prevents people is the fear of traffic.
"I look forward to further extensions of 20mph speed limits to reduce speed and improve the safety of vulnerable road users," he said.
The AA meanwhile called on the Government to make cycling easier by spending more on filling potholes.
"They are a nuisance for motorists and dangerous for cyclists," a spokesperson said.
