A £78m performance space named after the late Tony Wilson's record label is to be built by Manchester City Council and Allied London in the emerging St Johns development off Quay Street.
The Factory Manchester will have a 2,200 seat theatre with a standing capacity of up to 5,000 and will be the permanent home to the Manchester International Festival, currently based in Bruntwood's Blackfriars House, off Parsonage Gardens.
The new centre will also commission artwork in the innovative spirit of MIF, a biennial festival of premieres, from across the arts and popular culture.
The next phase of the project involves more detailed design and funding planning. The centre could be open by 2019.
Cllr Sir Richard Leese, Leader of Manchester City Council, said: "Manchester has a thriving creative industries sector and culture plays a central role in our growth strategy. The arts are not just a major employer in their own right but help us to develop, attract and keep talented people and is a fundamental element of a city where people choose to live and work. The Factory Manchester will also feed the increasing demand for arts as the city continues to grow and provide a Northern base for those wanting to work in the creative industries to grow their skills."
Maria Balshaw, director of Manchester City Galleries, said: "Manchester, at the heart of a wider region, has unique potential to become the cultural counterweight to London that the UK needs for successful economic and creative growth. Today's announcement is a tremendous leap towards realising that vision."
Tom Bloxham, chairman of Manchester International Festival, said: "The Factory Manchester will be a new kind of large-scale venue comparable in scale to London's Coliseum connected to one side of a Tate Modern Turbine Hall-type structure. As well as providing a new home base for MIF, it will commission and welcome innovative works from companies and artists around the world. Like MIF, it will attract ground-breaking and pioneering works which might not otherwise come to the North of England, or even the UK, and the concept is in many ways born from MIF. This is great news for MIF and for Manchester."
Michael Ingall, chief executive of Allied London, said: "The Factory Manchester will play a powerful part in the creation of St Johns. There will be several important complementary parts to this new neighbourhood and all these parts will come together to create a purpose and a soul, with culture, art and performance mixed with enterprise to create a very exciting place to be and to live and work."
George Osborne, Chancellor of the Exchequer, said: "I am delighted to today give Government support to this major new cultural and theatrical space in Manchester. I have always said that culture is a key part of the Northern Powerhouse. I think that the name that has been suggested is absolutely brilliant. The Factory is Mancunian to the core."
Alison Clark-Jenkins, director of the Arts Council, said: "We welcome the Chancellor's recognition that culture is one of the drivers of regional growth and the northern powerhouse. This development will add significantly to the UK's capacity to break new ground in arts and culture, and create new and innovative work for audiences locally, nationally and internationally. Combined with an already strong cultural and media infrastructure, Greater Manchester and the wider north can become a place where permanent and successful careers in the creative industries are a reality for many more people. We look forward to working with all partners on this exciting project to ensure this is a sustainable proposition for the whole arts ecology."