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City officials said a large part of the original 75,000-seater stadium would be preserved and the renovated stadium would have a capacity of 80,000 seats.
It will act as the venue for all the city's major sporting events, the Berlin government said. Soccer officials also want the stadium to be one of the centrepieces of Germany's bid to stage the 2006 soccer World Cup.
City authorities also said they wanted to ensure the stadium, currently home to first division soccer side club Hertha Berlin, could continue to function during rebuilding.
Hertha president Manfred Zeimaitat criticised the decision to turn the stadium into a multi-purpose venue and said the rebuilding threatened his club with financial losses.
"We will probably have to live for a year on a building site, which will obviously be a very difficult situation for us because one doesn't know how great our capacity will be," he told InfoRadio Berlin-Brandenburg.
Arrangements for the financing of the project remain open.
The city government said it was not possible to finance the rebuilding exclusively through private sources and the federal government, as owners of the grounds, should also make a contribution to renovation costs.
The question of who is to shoulder the bulk of the renovation costs, estimated at between 600 million marks ($340 million) and one billion marks ($566.7 million), has long been the subject of debate between the federal government and cash-strapped Berlin city authorities.
The president of the German Sports Federation, Manfred von Richthofen, also said he was sceptical about the decision to make the stadium a multi-functional venue, at a time when new stadia world-wide are tending to be dedicated single sport facilities..
The stadium, which is preserved as a historical monument, housed the Allied British military headquarters in its grounds after World War Two.