The research could transform the lives of thousands of people.
Hearing aids and implants are limited because users are often unable to pick out complex sound or hear clearly among background noise.
Researchers at The Bionics Institute in Melbourne are developing a way to adapt the cochlear implant in the ear to stimulate the auditory nerve using light instead of electrical impulses.
This means sounds can be specifically targeted along different frequency regions along the auditory nerve.
Dr Carly Anderson, of Action on Hearing Loss, said: “This is really exciting, and could go a long way to solving the current limitations with cochlear implants revolutionising how we can restore hearing to deaf people.
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“This could enable people to communicate more effectively, which could greatly improve their quality of life.”
Researchers carrying out laboratory studies of the new device have secured the support of Action on Hearing Loss, which this month launches a fundraising campaign for its development.
Cochlear implants, developed 40 years ago, and used by 12,000 people in the UK, provide a sensation of hearing.
They consist of two main parts; a speech processor and a surgically implanted receiver and a set of electrodes.
The microphone picks up sound waves which it sends to the processor where the converted sounds are transmitted to the brain.
However, results vary dramatically depending on the health of the inner ear and the individual brain.
Researchers found a way to enable the nerve to become responsive to light instead of electrical signals using gene therapy.
Around 650 adults and 500 children receive a cochlear implant each year but it is estimated only about five per cent of those eligible for an implant actually receives one.
Experts believe this could be because people are not aware they could benefit. People need to be profoundly deaf and gaining little or no benefit from hearing aids.
There are more than 11 million people in the UK with some form of hearing loss. More than 900,000 people in the UK are severely or profoundly deaf.
Ed Rex, 32, from Wood Green, north London, of Action on Hearing Loss, has a progressive hearing loss condition which has affected him since he was a child.
He was fitted with a cochlear implant six years ago, which he said “completely changed my life”.
He struggles to hear people in bars with background noise but added: “The implant gave me confidence again. I heard a grasshopper chirping for the first time.
“The possibility of this new technology is fantastic. I would no longer feel the need to stress myself out when I go out.”