The announcement comes just days after Bangladesh signed an agreement to repatriate to Myanmar the Rohingya refugees languishing in overburdened camps along its border.
A government economic council chaired by Prime Minister Sheikh Hasina gave the greenlight to the planned redevelopment of Bhashan Char island, a project that has attracted fierce criticism since being first proposed in 2015.
Planning Secretary Ziaul Islam said it was hoped the island would be ready from May to accommodate some of the more than 620,000 Rohingya Muslims that have crossed the border in the past three months.
"Approximately one lakh (100,000) people will be shifted there for the time being. We hope the project work will be completed by 2018," he told AFP.
"The navy has been given the task in an effort to expedite the (project) work."
Apart from building shelters, low-lying areas of the island must be filled in and embankments erected around the entire perimeter to ensure it can resist tidal flooding, monsoon storms and seasonal cyclones.
The silty strip of land only emerged from the Bay of Bengal in 2006, and lies one hour's boat journey from the nearest inhabited island.
But the scheme was revived in late August as unprecedented numbers of new Rohingya arrivals poured into Bangladesh's southernmost Cox's Bazar district, placing enormous strain on limited resources and makeshift camps in the border region.
Bangladesh Foreign Minister A.H Mahmood Ali in September appealed for international assistance to transport Rohingya to the island.
But leaders for the persecuted Muslim minority remain opposed to the idea and a UN agency official warned any attempt at a forced relocation would be "very complex and controversial".
The navy has built two helipads and a small road on the island in recent months but concerns persist over its suitability for human habitation, with experts warning it could be swallowed by tides and rising seas.
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