The Internet transport infrastructure is moving towards a model of high-speed router networks that are directly interconnected by re-configurable optical core networks. This IP over Optical (IPO) architecture, when coupled with the emerging IP-based Generalized Multi-Protocol Label Switching (GMPLS) control plane, offers network operators opportunities for dynamic, multi-layer optimization of traffic engineering. We present a novel approach for joint optical network provisioning and IP traffic engineering, in which the IP and optical network domains collaboratively achieve the objective of maximizing the benefit of carrying end-to-end IP traffic at the minimum lightpath design cost. Our approach is developed under the Overlay inter-networking model with each network having a limited view of the other. The cooperation is achieved through minimal information exchange. Our solution is based on a novel application of Generalized Bender's Decomposition to implement distributed, multi-layer optimization. The process converges to the optimal value of the objective function. A case study is presented to illustrate the proposed method.