The Leicester Islamic academy will become one of only a handful of state-funded Islamic schools in the country.
The decision comes after months of argument, plus a formal objection from the City of Leicester college, which has a high percentage of Muslim pupils on its 1,500 roll.
A 600-pupil school replacing the Islamic academy, which charges pound;1,400 a year and is run from a converted house, is being built on a disused factory site.
It will be called Madani high, admit 10 per cent of non-Muslim students and open in 2007. The school will be voluntary-aided but funded by the state.
Mohamed Mukadam, principal of the Islamic academy, said: "Just one person and just one school objected. There are always worries, but we knew if we did everything by the rules, we would be OK."
Suleman Nagdi, a spokesman for Leicester's Federation of Muslim Organisations, said the community was pleased, not just because it was an Islamic school, but because of the hope of paving the way for schools of other faiths in Leicester.
"It is about parental choice," he said.