The new national stadium is to be built at Lansdowne Road, the Government confirmed this afternoon.
Following a Cabinet meeting this morning agreement was reached on a plan to build a 50,000-seater stadium on the city-centre site.
The Minister for Sport and Tourism, Mr O'Donoghue also announced that the phased development of a sporting campus at Abbotstown in Dublin would now also get underway.
Mr O'Donoghue said it was a "landmark day" for Irish sport and added that the redevelopment would bring the State's national sporting infrastructure "into the 21st century on a much loved site which resonates with history and tradition."
The Government is contributing €167 million to the €250 million project. Mr O'Donoghue said.
A planning application for a re-developed Lansdowne Road will now have to be made and that is expected to be vigorously contested by neighbouring residents.
"We are not concerned about the planning," said IRFU chief executive Mr Phillip Browne. "At the end of the day, we now have to sit down and go through the planning process and part of that is obviously to consult with out neighbours at Lansdowne Road."
"We have a lot of experience working with the residents, given we have held internationals at Lansdowne Road since 1975," he added.
The decision is likely to be seen as a victory for the PDs whose support for the Dublin 4 site won out over the Taoiseach's championing of an alternative site at Abbotstown.
Details of the joint IRFU/FAI proposal were unveiled last week following five years of political wrangling over a national stadium.
But difficulties remain such as how to resolve drainage problems and question marks remain over access for fans to the new stadium.
A major obstacle for the Dublin 4 development is expected opposition from local residents' groups likely to fiercely oppose the €250 million plan.
In a bid to assuage many of these objections the plan was scaled down to a 50,000-seater stadium following a warning from the Office of Public Works that a stadium over 45,000 seats would run into planning hurdles.
The latest plan offers 50,000 seats and retractable roof. The completion target is for 2008. This could allow a derogation for Ireland's 2006 World Cup qualifying games to be held at Lansdowne Road, despite seating difficulties.
If a further derogation is not forthcoming the FAI will be obliged to organise Ireland's home games in Britain, with Parkhead in Glasgow, the Millennium Stadium in Cardiff, or Old Trafford in Manchester, being touted as possible venues.