The Caltongate plans were passed by eight votes to six at a meeting of Edinburgh Council's development management sub-committee.
An international consortium is behind the plans for leisure, retail and office space covering around 220,000 sq ft linking New Street and East Market Street with Waverley Station and the Royal Mile. The development will feature a £6.5m civic square, as well as office space, 400 hotel bedrooms and commercial units.
Residents and heritage groups opposed the plans and more than 5000 people signed an online petition claiming the development represented a "grave threat" to the Old Town's status as a Unesco World Heritage site.
Councillor Ian Perry, convener of the planning committee, said it would "breathe new life" into a derelict area previously the site of a bus garage and gas works.
He said: "I would like to thank those who have taken the time to contribute to the debate about this site over the last 10 years.
"Following an 18-month consultation period on the current plans, it is great news that we have a decision on a development which I believe will breathe new life into a long-standing vacant site in the heart of the city.
The consortium, headed by Artisan Real Estate Investors, aims to preserve the listed Canongate Venture building, the historic Sailor's Ark frontage on the Royal Mile and regenerate the arches in East Market Street.
Cllr Perry said there would be substantial investment across the site and a new public square will make the area more attractive and pedestrian-friendly. In addition, a new public viewing area will be built giving views across to Calton Hill from Johnston Terrace.
He added: "As the development has a mix of uses it will attract many more people to the area and with new housing on adjacent sites, including 40 affordable homes that are already being built, it will bring a real boost to the Old Town community. The economic benefit of this new development is huge and is estimated to bring in £43m to the local economy each year, as well as creating almost 2000 jobs."
Artisan previously obtained planning permission for 145 residential units and 40 affordable homes.
Its managing director Lukas Nakos said yesterday: "This has been an exceptional planning approval for an exceptional development.
"Today marks a significant milestone in the evolution of one of the most challenging city centre developments in the UK, and we now have the opportunity to deliver on our promises made when we first started this process, more than two years ago.
"Our proposals are the result of an 18-month consultation process bringing together local people, businesses, civic partners and heritage bodies. This has led to many facets of the area's unique Old Town setting being retained, including the retention of the Canongate Venture building and the façade of the Old Sailor's Ark."
It has the potential to create up to 1750 jobs with 720 jobs being created as part of the construction phase, which could start in the summer.