The extension was given formal approval by Secretary of State for Transport, Patrick McLoughlin, and follows a Transport and Works Act Order public inquiry last summer.
The go ahead means preparatory work on the £18 million extension can start later this year with completion scheduled for 2019.
The route will take trams along Pipers Row, stopping directly outside the bus station before continuing on to the railway station which will also be redeveloped as part of the Wolverhampton Interchange Project.
The Metro scheme is being carried out by Transport for West Midlands (TfWM), the transport arm of the West Midlands Combined Authority (WMCA), in partnership with the City of Wolverhampton Council and Neptune Developments.
Not only will the extension improve passenger connections between bus, train and tram services but also support the ongoing redevelopment of land next to the railway station which is expected to see £120 million of investment and 1,400 new jobs.
Councillor Roger Lawrence, leader of City of Wolverhampton Council and West Midlands lead on transport, said: "Today's approval is excellent news because the extension can play a key role in unlocking further investment and jobs - not just in Wolverhampton but also other parts of the Black Country.
"If we are to succeed in revitalising our city then we must have the right transport infrastructure in place to open up new areas for redevelopment and underpin our long term ambitions."
Councillor Lawrence said the extension would provide improved Metro links to the wider West Midlands including a route through to the proposed high speed rail station and the Broad Street area in Birmingham city centre.
Steve Parry, managing director of Neptune Developments, said: "The announcement is great news for the Wolverhampton Interchange scheme as the Midland Metro extension is the element that will tie the commercial developments and the new bus and railway stations together."
Following a 6 week legal challenge period the Transport and Works Act Order will come into force and allow work to start on advanced utility diversions.
This will be followed by works to the Pipers Row car park that in turn will create the space needed to divert the underground pipes and cables buried along the route of the tram extension.
The work is part of the wider Interchange project being funded by the Black Country Local Enterprise Partnership, City of Wolverhampton Council and the WMCA.
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- released: Wednesday 22 June, 2016