The agency will work with regional development agency Yorkshire Forward and regeneration body Renaissance South Yorkshire to regenerate the Hesley Wood tip in Chapeltown.
The plans include a network of public footpaths and cycle tracks. The partners are currently looking for a contractor to carry out the reclamation work before submitting a full planning application for the new uses of the site.
Head of Property & Coalfields at Renaissance South Yorkshire, Ian Bramley said: “This funding will enable a large contaminated brownfield site to be reclaimed and given back to the local community to enjoy.
“When considering the options, there was naturally an emphasis on leisure and recreational uses of the site due to its green belt status. This funding will ensure that the local community is able to enjoy Hesley Wood safely in the future.”