Health managers at Derriford Hospital have been given the all-clear to ask for bids to build a new 200-bed hospital on the site.
Derriford was built in the 1970s
The tender process for the Vanguard Project has been dogged with problems after two of the three bidders for the private finance scheme pulled out.
Health managers went back to the drawing board and decided to split the massive project into two stages.
The first stage is to build the new planned care centre by 2010.
The second stage involving the demolition and rebuild of 80% of the existing hospital should be approved next year.
The proposals have been approved by the Strategic Health Authority.
Project director Andy Ibbs said: "We are confident we now have an even better Vanguard plan to take to the private finance market in two stages.
"This project will produce better facilities all round for patients and be more attractive to companies interested in bidding.
"We have already had informal expressions of interest from seven companies which is very encouraging."
Chief executive Paul Roberts said: "I am delighted by the Strategic Health Authority's decision.
"This is really good news for the future of healthcare in this area; it will mean better, more up-to-date facilities for staff and patients.
"We are very excited about moving this project on, making these plans a reality and developing healthcare facilities that we can be really proud of."