The long-awaited transformation of Birmingham's Queen Elizabeth Hospital into a super-hospital has finally received the green light, Tony Blair will announce today.

The #697 million scheme - which was originally estimated at about #200 million when the idea was first aired in 1997 - is the biggest new hospital project outside London.

Coupled with a #325 million Sainsbury's development in Selly Oak, plus an additional #40 million invested by the supermarket, city council and trust in building new roads, it will be Birmingham's largest act of urban regeneration, costing nearly #1 billion.

Under a Private Finance Initiative deal, a consortium led by Balfour Beatty will build the super-hospital and provide some maintenance services, in return for payments over 35 years.

Plans for a new state-of-the-art facility had been in limbo after the Government ordered a review of all major hospital building projects.

It followed fears that the NHS was set to run up a deficit of up to #900 million, which resulted in ward closures and sackings across the country as hospitals tried to save money.

The Department of Health and the Treasury have now approved the Birmingham scheme, in Edgbaston, and the Prime Minister and Health Secretary Patricia Hewitt are expected to announce the decision at a health summit in Downing Street this morning.

The new facility will provide 1,231 beds as well as an accident and emergency department, specialist burns and transplant wards, a decontamination suite and operating theatres.

Development of the site has already started and new facilities will start opening to patients in early 2010, with final work to be completed in late 2012.

The Queen Elizabeth rebuild has been planned for eight years, and has been reviewed five times. But in January it emerged that final approval had still not been granted.

Managers at University Hospital Birmingham NHS Trust, which runs the hospital, expressed concern that the project was under threat.

Fears were raised earlier this month that the proposals would be scaled back, when Treasury troubleshooters were sent to Birmingham to find ways of reducing costs.

City MPs, led by Edgbaston MP Gisela Stuart (Lab), lobbied Health and Treasury Ministers to highlight the importance of approving the hospital.

Some of the existing buildings are about 100 years old, and the poor quality of the hospital's infrastructure has been linked to the spread of infections such as MRSA.

The new facility will include a Centre for Defence Medicine, in partnership with the Ministry of Defence, a Clinical Sciences Centre, in partnership with the University of Birmingham, and services for mental health-care, replacing an existing site at Selly Oak.

Construction work is expected to create 5,000 jobs.

Ms Stuart said: "This is what Birmingham deserves. It is a massive investment in healthcare for the city and a major project we can rightly be proud of. We have been trying to rebuild the QE for 20 years now, and a Labour Government is going to make it happen."

Health Minister Liam Byrne, MP for Birmingham Hodge Hill, said: "This is a great day for the NHS and a great day for Birmingham.

"We need this, we fought for it and now we have got it."