Culture Secretary Tessa Jowell gave the green light for the service provided it meets 12 conditions described by Jowell as the "toughest set ever issued for a TV channel".
They include a requirement that 80% of the service's output must consist of genuinely new programmes commissioned for the channel and the that programmes should not be at the expense of those on BBC One and BBC Two.
In a nod toward the level of concern about the service from the BBC's commercial rivals, Jowell has also stipulated that BBC Three will be reviewed after two years to include an independent assessment and a public consultation which will look at its impact on the broadcasting market.
The Incorporated Society of British Advertisers (ISBA) responded by stating that it would ask the government whether Ofcom, the proposed single communications regulator, will be given full authority to regulate BBC Three.
ISBA director of public affairs Ian Twinn said the government would find it easier to ensure that the 12 conditions were met if it handed the task to Ofcom.
Of all the BBC's planned digital services, BBC Three has been the most controversial, as it targets the demographic so valuable to advertisers and commercial broadcasters.