The project will see the services currently delivered at Headley Court move to a new purpose-built location at Stanford Hall, near Loughborough.
The MoD said the new facility will be four times the size of Headley Court and will "improve and advance the cutting-edge treatments already available to injured members of the armed forces".
It is planned that the new Defence and National Rehabilitation Centre will open its doors at the end of 2017.
Prime Minister David Cameron said: "We are committed to providing the best medical care possible for those injured while bravely serving their country. This new Defence and National Rehabilitation Centre will build on lessons learnt from recent conflicts, help ensure the UK remains at the forefront of advances in medicine, and build an unparalleled regional centre of excellence in the Midlands.
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"There is no greater example of the commitments under the armed forces covenant than providing first class medical care to our wounded, injured and sick personnel."
Defence Secretary Philip Hammond said: "Today's announcement will establish a long-term, state-of-the-art rehabilitation facility for our injured personnel, building on the great work of Headley Court, to ensure our armed forces continue to receive the very best care."
The Surgeon General, Air Marshal Paul Evans, added: "Thanks to the Duke of Westminster's initiative and his generosity, and that of other benefactors, a new state-of-the-art medical rehabilitation centre will provide our injured troops with a remarkable place to recover and begin rebuilding their lives."
Construction at Stanford Hall will commence in 2015 and Headley Court will continue to provide rehabilitation to armed forces personnel until the new establishment is operational in 2018.
(IT/JP)
