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The approval is for the £48m first phase of the development.
Phase one of the project will include a state-of-the-art facility providing services for the adult acute mental health inpatient service, older people's mental health assessment unit, Intensive Psychiatric Care Service (IPCU) and a new Robert Fergusson national brain injury unit.
David Small, Chair of the Royal Edinburgh Hospital Project Board, NHS Lothian, said: "This is a very exciting step in the development of this project and we are now within sight of construction beginning later this year.
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"The next step in the process is the development of the Full Business Case which we anticipate submitting for Scottish Government approval in September this year."
Elsewhere, works to prepare the site for the new facility will start this week. Among the works taking place will be the removal of shrubbery, a small number of trees and other debris and the demolition of the recently-vacated Scottish Ambulance Service building. A therapeutic garden activity area will also be created.
Welcoming the plans, Health Secretary Alex Neil said: "I am pleased that plans for this modern mental health care facility have received outline business case approval.
"Plans for the new facility reflects the fact that mental health services should not exist in silos but be fully embedded into community care to deliver better outcomes and joined up care for patients.
"The new campus, which is part of the Scottish Government's £750-million investment in health infrastructure across Scotland, will also see efficient use of energy, water and waste management to reduce costs and carbon emissions."
The redevelopment of the hospital site will be undertaken in partnership with Hub South East Scotland, with Morrison Construction appointed as the preferred contractor for phase one.
A projected timescale for the completion of phase one is 2016, with the whole project possibly taking up to 10 years to complete.
(JP/IT)
