Terra Nova, the consortium responsible for the project, agreed to implement 37 environmental programs during the power plant's construction, according to federal gazette Diário Oficial da União.
The decision ends a two-year impasse prompted by Ibama's demand for further environmental impact studies.
Located on the Teles Pires River in Brazil's western state of Mato Grosso, São Manoel's 30-year operating concession was secured by Terra Nova during December's A-5 auction.
The plant is due to begin operating in 2018 with investments of $1.13 billion.
Other hydroelectric plants being built on the Teles Pires River are Colíder (300 MW), Teles Pires (1.82 GW) and Sinop (400 MW).