Manchester City Council has confirmed that a planning application to add up 14,500 extra seats at the venue has been approved.
The Premier League club intend to increase both ends of the 47,670-capacity arena by 6,250 and add up to 2,000 additional seats around the pitch.
City made public their proposals for the stadium last summer and a formal planning application was made in November.
The increased capacity will make the Etihad Stadium the second largest in the Premier League, behind only Manchester United's Old Trafford.
It will be the club's second major construction project in quick succession following the building of the £200million City Football Academy adjacent to the stadium.
The CFA, which will become the training base for all the club's teams and house medical and accommodation facilities, is due to open later this year.
According to the manchester Evening News, both projects underline not only City's determination to develop world-class facilities at their Etihad Campus, but also their commitment to local regeneration.
City's work has contributed significantly to the development of east Manchester, with a sixth-form college and a leisure and retail centre already being built alongside the CFA.
The stadium expansion, according to the planning application, is expected to created 160 temporary jobs during construction and a further 110 matchday positions once the work is complete.