Dedicated to the Queen Mother, the proposed central plaza will be overlooked by flats, social housing, shops, a small hotel and cafes.
The scheme has been described as a 'fitting tribute' to the Queen Mother, who died aged 101 in 2002, and a planning application for the project on Duchy of Cornwall land is expected to be submitted in the next few months.
A spokesman from Clarence House said: 'The Prince was very keen to name the next part of the development at Poundbury after his grandmother as a fitting tribute to somebody he held very dear.'
It is understood Terry's name was first mooted for the project in Dorset nearly two years ago. Describing the scheme Terry said: 'I'm very honoured.
'There will be no memorial statue or obelisk or anything else. The whole idea is it's a social place to go to meet with friends.'