The environmental agency Ibama granted a consortium including the French utilities giant Suez the license to build the Jirau dam on the Madeira River, an Ibama spokesman said.
The Jirau project and the nearby Santo Antonio dam are part of a plan to dam one of the Amazon river's biggest tributaries to ensure Brazil's economy will have sufficient energy supplies over the next decade.
The two dams, which together form the $13 billion, 6,450 megawatt Madeira River Hydroelectric Complex, will also create a waterway that would reduce shipping costs for Brazil's agriculture exports.
Environmentalists say the dam could dramatically change the nearby ecosystem by flooding hundreds of thousands of hectares, and they insist the government has not provided enough safeguards to prevent ecological damage.
A dispute between Suez and Brazilian construction company Odebrecht over the location of Jirau threatened to spark lawsuits that would have delayed the project, but the companies later agreed to settle out of court.
Suez is the lead partner in a consortium developing Jirau that also includes Brazilian state companies Eletrosul, Chesf and construction company Camargo Correa.