Here's my map. Haven't colour coded the lines by speed, though there are several stretches of dedicated high speed line (should be fairly obvious from looking at the map which these are).
Grey means I'm not sure for one reason or another, but that the line should probably be built.
http://img207.imageshack.us/img207/7569/railmap.png
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Your options would be:
a) use the route you described and close the main road, making road traffic use the tiny little road on the West shore of Thirlmere. Even then, Dunmail Raise could be problematic
b) Tunnel under Kirkstone Pass and take the line up Patterdale. Would be extremely unpopular (Patterdale is often described as the most beautiful valley in England, and with some justification) and would take you rather further east of where you would want to be
c) Tunnel under Ullscarf. Extremely expensive - you would need a very long tunnel as the upper end of Borrowdale is steep.
d) drain Thirlmere back to its natural level and tunnel under Dunmail Raise. Deprives Manchester of its main source of water.
e) don't bother. There are good enough bus connections between Ambleside and Keswick anyway...