The competition, which will take place every four years, will see the winning city organise a year-long arts programme including events normally confined to London, in turn providing more opportunities for local agencies and suppliers.
Liverpool's year as European Capital of Culture generated £176m in tourism for the city.
The idea has been developed by Liverpool's Capital of Culture chairman, Phil Redmond, in union with Andy Burnham, the Culture Secretary.
"By receiving national recognition as a city of culture, any city of the UK could be given an opportunity to bring out the creative skills, talent and enthusiasm of its people - showcase it on a national stage - and change perceptions of it," said Burnham speaking to The Daily Telegraph.
The aim is have the scheme in place ahead of the cultural Olympiad, which is planned to coincide with London 2012.
"The value of regional cultural events is massive and this will be a huge boost to local agencies," said The Rouge Partnership business development manager Mark White. "Events like the Edinburgh Festival suck up all the attention and spend, so anything that will help to diffuse that around the country is a good thing."
"This prospect will be great for the events industry," said Logistik senior client manager Rob Smalldon. "How better to showcase a city’s flair and culture than by holding events which engage its residents and encourage visitors to the city. I think the opportunities will be endless for events agencies such as ourselves."