An outline business case for the new facility has been approved.
The building, which planners hope will be completed by 2017, will be located at the Royal Infirmary of Edinburgh at Little France.
Its construction will be supported by a cash injection from the Scottish Futures Trust, which is investing £750m in health facilities across Scotland.
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Approval of the outline business case will see NHS Lothian take the next step in the process to select a private sector partner to design, build, finance and maintain the new facility.
Health Secretary Alex Neil said: "There have been delays with the new Sick Kids Hospital in the past, due to land and commercial issues with an inherited PFI contract on the proposed site. I am pleased to say that there is now a framework in place to resolve the legal and commercial issues that arose in the original contract.
"This project is part of a £750 million health pipeline delivering a range of improvements to hospital and community health facilities right across Scotland.
"I've been clear in the past that investing in our infrastructure is vital to growing our economy and the NHS presents huge opportunities to do this. Not only will it bring benefits to business and more jobs but it also means that patients can be treated in the best possible surroundings."
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