Auckland Castle, which has been described as one of the most important Christian herritage sites in the country, will use the money from the Heritage Lottery Fund (HLF) to build a dramatic two storey museum extension, and renovating the centuries-old castle's state rooms, from where the powerful Prince Bishops of Durham once ruled the North of England unopposed.
It's claimed up to 130 jobs will be created, acting as a major catalyst for the regeneration of Bishop Auckland and the surrounding area.
Speaking about the redevelopment, Auckland Castle Trust's Chief Executive, David Ronn, said: "It is fantastic news not just for Auckland Castle but the whole area, a real vote of public confidence. The HLF decision comes on the back of two years of hard work by a great many people.
"To say that we are absolutely delighted is an understatement, and the size of this award proves that the North East is taken seriously by the Heritage Lottery Fund.
"The value of this grant to both Auckland Castle and the immediate area cannot be understated. The work it will allow us to do at the castle, and all the activity that will flow from that - job, training and volunteering opportunities - will play a major part in helping to breathe new life into Bishop Auckland."
It's hoped all the work will be finished by 2018.
Listen to Chris Ferguson, Curatorial Director of Auckland Castle, speaking to Premier's Ian Britton.