Lancaster City Council has granted planning permission to the Castle View project - a mixed-use regeneration scheme.
The plans - being led by London-based urban regeneration firm Centros - feature six public spaces.
The new park will lead to Lancaster Canal and there will be a public piazza linked to a pedestrian shopping street.
The 15:4 decision in favour of Centros's outline plans for the 4ha site follows three years of master-planning and consultation.
Centros associate director David Lewis said: "This is a great decision for Lancaster, as it will secure the city centre's future by enabling it to compete successfully with Preston and other centres in the North West.
"The site is quite unusual in that it slopes upwards from the existing city centre to a canal and includes two theatres and the city's unique Musicians' Co-operative.
"It has offered us the opportunity to create a truly mixed-use scheme featuring retail, residential and commercial uses while also fostering a vibrant cultural quarter and providing some six public spaces."