Plans for a canal link at the Pier Head site have also been approved

The Museum of Liverpool will be built on the Mann Island site at the Pier Head and will replace the current Museum of Liverpool Life.

The North West Development Agency (NWDA) approved funds of more than �33m for the redevelopment of the site.

It also earmarked a further �7m to build a canal link from the Central Docks across the Pier Head and to the Albert Dock.

The project will provide a larger exhibition space to house the urban history collection currently at the Museum of Liverpool Life.

It signals take off for European Capital of Culture in 2008 David Fleming, Museum of Liverpool Life

Exhibits will cover social history and popular culture and will look at Britain and the world through the eyes of Liverpool.

Steven Broomhead, chief executive of the NWDA said: "Mann Island is a key waterfront site, providing a gateway from the waterfront to the city centre.

"After a full appraisal of the proposals for the area, I am now confident that the site will become a major new world class visitor destination, contributing to the economic development and regeneration of Liverpool, Merseyside and the Northwest region as a whole."

David Fleming, director of National Museums Liverpool, said: "This is an amazing boost for the city and the region and it signals take off for European Capital of Culture in 2008.

"We are delighted that NWDA have demonstrated such foresight in supporting the Museum of Liverpool and that they are confident that we can deliver a world-class visitor attraction as a legacy to 2008."