Preston Council has ruled the scheme will not have a significant impact on the environment, clearing the way for a full planning application to be lodged.
The scheme involves a major redevelopment of the Whittingham and Goosnargh Sports and Social Club which was once the staff club when the hospital was in use.
The old clubhouse is to be knocked down and replaced by a modern building.
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And the majority of the existing sports facilities will be brought up to date with a brand new multi-use games area (MUGA), a new full-sized football pitch, tennis courts and camping and caravanning pitches. The established bowling green will be retained.
When the work is completed it is hoped the new sports and social club will be a hub for families living on the redeveloped Whittingham Hospital site.
There are plans for up to 900 houses on the vast site, as well as a primary school and public open space.
Whittingham Hospital was built in 1873 and grew to become the largest mental hospital in Britain with up to 3,000 patients.
But during the 1960s and 1970s, with the advent of new drugs and treatments, many patients were returned to the community, sparking Whittingham's gradual decline.
The hospital eventually closed in 1995 and most of the old buildings have since been demolished, leaving just the hospital's church and a couple of small units retained by the NHS.
Of the 120 acre site, six have been set aside to build the new club and its sports facilities.
A report to the planning department says the new club will be built in roughly the same area of the site, directly to the south of the Taylor Wimpey development which has been under construction.
It will be "broadly in line with its current location, albeit with a new configuration and new suite of facilities.
"The existing bowling green will be retained, but all other facilities will be new."
It says the scheme will bring "important social and economic benefits for the local area."
It will also provide "contemporary facilities and provide the club with a significant potential new membership base."