An agreement signed between Estepona town hall and the Andalusian health authority (SAS) has meant that the local authority can now build the new hospital with a budget of 17.7 million euros.
The construction work is expected to take 22 months to complete and the hospital could be open by the middle of 2019.
The announcement comes six years after the previous contract was cancelled when archaeological excavations had to be carried out.
According to the agreement signed at the end of last year, the town hall will pay for the construction of the hospital as well as the development of the surrounding area.
The health authority will be responsible for fitting out the new hospital and running and maintenance costs after its opening.