Work on a £6 million-plus flood prevention scheme will start later this month following confirmation of vital funding.
The Ministry of Housing, Communities and Local Government has approved £2.79 million in funding from the European Regional Development Fund (ERDF) for the project.
Durham County Council had already committed up to £1.5 million to the scheme, with the remainder of the cash coming from the Environment Agency, which is contributing £1.9 million.
The money will allow the council to open up a 90m stretch of the Cong Burn, which runs underneath the town’s Market Place.
As well as reducing the risk of flooding, it is hoped that the move, which will see the watercourse transformed into an attractive landscape, will provide an economic boost to the town.
The work will reinvigorate the existing "red carpet" area of the Market Place, creating a location with the potential to host festivals and events as well as the existing market.
Chester-le-Street has a history of flooding and was particularly badly affected by a severe storm in June 2012.
Coun Simon Henig, the leader of Durham County Council, said: “This is a very important project for the town centre.
"Opening up the culvert will not only help reduce the risk of flooding, it also gives us the opportunity to breathe new life into the town centre by using the water course as a focal point.
“Over the years the market place has seen many changes. This development will hopefully give traders new opportunities and help the area go from strength to strength.”
Work on the scheme is due to start in early 2019 and is expected to be completed by March 2020.
Simon Wilson, senior advisor on the Environment Agency’s flood and coastal risk management team in the North East, said: “We know how devastating it is to be flooded and hopefully this work will offer residents some peace of mind that they are better protected while also providing an area the whole community can enjoy.”