The Grade II-listed building, on Castle Street, is more than 200 years old and has served a number of purposes including as a courthouse but been derelict for the past 23 years.

On December 17, developers Aestrom were given the green light to turn it into a block of 12 apartments. Former cells would be transformed into 12 “pod” hotel rooms and a souk market with 11 stalls, which will be open to the public.

It was decided at a highways and planning committee meeting today after much discussion.

Councillor Mazher Iqbal, cabinet member for business and development, said: “The Old Town Hall is a significant part of our city’s history, and, because it’s in the heart of our rapidly evolving Castlegate quarter, we have committed significant time and effort to ensuring its future viability.

“We have worked very closely with the developer to make sure we preserve the building as much as we can. The detailed work that we have already undertaken on this building shows how much pride we have in making sure it was not demolished, but preserved and restored.”

Shocking photographs as fire service and police rush to scene of failed ram-raid blaze which has destroyed West Yorkshire supermarketBefore and after pictures show effect of 'biblical' South Yorkshire floodsThere have been two rounds of consultation and planners say a “significant amount” of revised proposals but heritage groups are concerned internal fixtures and fittings will be removed, erasing the memories of it being a courthouse.

The Friends of the Old Town Hall have spent the past five years fighting to find a solution that protects the heritage and brings the site back into use.

Valerie Bayliss, of the group, said: “We are as keen as anybody to see this building restored and brought back into use. We fully understand bringing a building like this back into use inevitably involves compromise.

“What the council risks by accepting the proposals as they stand is losing precisely what makes the Old Town Hall worth keeping and we believe that is too high a price to pay.”

Planners say at least 50 per cent of the 42 benches due to be removed will be reinstated in the building. The remainder will be kept elsewhere for future re-use.

Lucy Bond, planning officer, said the only other application they had received for the site was for a nightclub in 2001, which Coun Peter Price said would have been a “nightmare” situation.

Councillors on the committee agreed the plans were the best option they had for the site.

Sheffield United among top-flight clubs slashing prices to keep young fans in the game'Russell Crowe to play Leeds-born chef Marco Pierre White in film biopic'Coun Roger Davidson said: “The planners have worked well to do their best to preserve what is feasible and I think this is a golden opportunity that we cannot throw away and I think it’s very brave of the developers.”

Coun Mike Chaplin said: “I think we have to get real about this. This is an opportunity and I feel if we pass it up this building will not be saved. I appreciate there are hard choices with the interior, most people will see the building from the outside and the outside still tells a story…I think it’s the best deal we’ve got.”

When the work is done, Coun Tony Damms asked if there could be an open day so the public could see what had been done with it and said it was good that it would become a “living building and not a shrine”.

All but one committee member voted to approve the plans. Coun Peter Garbutt voted against saying he wanted to see more details and have a site visit – which was not allowed due to health and safety reasons – although extensive video footage of the inside of the building was shown.

Grade II-listed Old Town Hall to be turned into hotel and apartments