Sri Lanka's cabinet said on Thursday it would allow a $1.5 billion "port city" deal with China to go ahead, dropping a threat to cancel the project which had been approved by the previous government.
India has raised concern over security threats posed by Chinese ownership of the freehold of 20 hectares of land next to the main commercial port in Colombo. India uses Colombo as a trans-shipment port.
Chinese President Xi Jinping launched the project, which will be built on reclaimed land, when he visited Columbo in September. India has become increasingly worried about China's influence in Sri Lanka.
Last year, Sri Lanka allowed a Chinese submarine and a warship to dock at Colombo, despite concerns raised by New Delhi.
President Maithripala Sirisena was elected in January. Sri Lanka's new Prime Minister, Ranil Wickremesinghe, said before last month's presidential vote he would cancel the deal if his party came to power because no environmental impact assessment (EIA) or feasibility study had been presented to parliament.
"The prime minister said that an EIA has been done for land reclamation. However, it needs a second EIA for constructions after the land is reclaimed," Senaratne told reporters on Thursday, adding that a feasibility test had been carried out.
Asked if this meant the government would allow the project to go ahead, the spokesman replied: "Yes."
The port city, which would be built on 233 hectares of reclaimed land, would include shopping malls, a water sports area, a mini golf course, hotels, apartments and marinas.