News that the company had won official clearance for the Western Isles development came on the day Scottish energy giant SSE agreed to pay $288 million to acquire from BP a stake in a gas field in the North Sea.
The Government's decision means Aberdeen-based Dana Petroleum can start the work required to bring the Harris and Barra fields onstream, with a target date of 2015 for first oil. The project is expected to create about 200 jobs.
Dana estimates the fields, which lie 100 miles east of Shetland, contain more than 45 million barrels of recoverable reserves.
With the fields expected to produce about 40,000 barrels oil equivalent daily, Dana's chief executive Dr Marcus Richards said the project was at the heart of the company's growth strategy.
Dana was acquired by the state-owned Korea National Oil Corporation (KNOC) in 2010 for £1.9bn.
With a 77% stake in the assets, Dana sanctioned the investment at a meeting of its board last week. The board includes representatives of KNOC.
The project is also being backed by a Japanese oil and gas company, Cieco, which has a 23% stake.
The companies' decision to proceed reflects the surge in interest in the North Sea, which has been driven by booming demand for oil and gas in places such as China. Majors including BP, Shell, Chevron and Total have announced plans to invest billions of pounds to bring a series of giant new fields onstream in UK waters.
John Hayes, UK Minister for Energy and Climate Change, said: "I am delighted to announce the go-ahead for this project, which will bring new jobs and create new opportunities for UK companies to compete for key parts of the work."
Scottish Government Energy Minister Fergus Ewing said: "Today's announcement that Dana Petroleum can take forward its £1bn North Sea development demonstrates the continuing growth of Scotland's energy sector."
Dana highlighted that consent for the project followed the introduction this year of tax breaks it said were helping to increase investment in the North Sea.
Malcolm Webb, chief executive of industry body Oil & Gas UK, said: "Government recognition of the importance of our oil and gas production for the economy and Britain's energy security and close engagement with the Treasury has resulted in a raft of new projects being announced on the UK continental shelf. However, exploration is still worryingly low and we need to do more to reverse the production decline."
Meanwhile, SSE has moved to secure access to gas supplies and to reduce its reliance on wholesale markets by agreeing to acquire BP's 50% stake in the Sean gas field in the southern North Sea for $288m. The field is close to some of SSE's existing upstream assets.
David Franklin, SSE's managing director for Energy Portfolio Management, said: "We have made clear that SSE is proactively seeking new opportunities to increase our presence in the upstream gas sector, where assets can be acquired for a fair price, and that is exactly what this deal represents."
BP could use the funds generated to help meet the massive costs of the Gulf of Mexico oil spill in 2010.
The oil and gas giant has sold a range of non-core UK assets since the spill for about $3.1bn, including the Sean deal.
Trevor Garlick, regional president of BP North Sea, said: "The divestment of BP's interest in the non-core, non-operated Sean field is consistent with our strategy of focusing on high-value assets with long-term growth potential."