The £60 million scheme will provide 408 one- and two-bedroom flats on the former Cambridge University Press site, including 122 affordable homes.
The council originally turned the scheme down on the grounds that it was 'over developing' the site, but Crest Nicholson challenged the decision, claiming it met all the requirements set out by the city's planners.
DCLG's decision to grant planning will come as a massive blow to the council, as well as to local residents, who have been fighting the project because of fears of over the number of units involved.
Speaking to the Cambridge Evening News, councillor Philippa Slatter said: 'I am very disappointed that we didn't get the support on this one. We will have to work very hard to make the most of what we are getting.'