New Covent Garden Market will be swept aside for an updated version on the 23ha site by the River Thames in London.
Defra secretary of state Hilary Benn, who gave the nod for the outline business plan, said the market would "continue to play a crucial role in London's food chain".
Covent Garden Market Authority will firm up a design brief next year and look to appoint a developer. Building work is due to start in around two years.
The market, which used to be on the famous Covent Garden square in "Theatreland", moved 30 years ago to its current location at Nine Elms in Vauxhall.
Chief executive Jan Lloyd said: "The changing nature of the tenants, an ageing infrastructure and a sprawling site layout mean the market is uneconomic to run.
"The project will include modern market stalls for traders, funded by the release of surplus land."
A representative said new facilities could include a food college, housing and "incubator" sites for new business start-ups.
The market sells more than 350 fruit and vegetable varieties.