The former Victorian asylum opened in 1848 and has been the scene of numerous fires and acts of vandalism following its closure in 1995.
Five years after it began the bidding process, the council took over the site in 2018.
Wales Office Minister Nia Griffith said: “It is fantastic news that this development is moving forward and breathing new life into this iconic site, which has been derelict for so long.
“Once it’s completed there will be new homes, business spaces and open green spaces to benefit the whole community.”
Huw Jones, chairman of Jones Bros, said: “The project still has a long way to go, and many elements need addressing and agreeing before we can begin work on site.”
He said his team was “excited” the project could progress to the next phase now funding has been approved.
“As a local company we are very aware of the site’s significance and the part it has played in the town’s history,” he added.
“It deserves to be restored and to become a focal point within this community once again.”
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