"The cabinet has decided to entrust the Nepal Electricity Authority (NEA) to develop the plant," Pushkar Dhungel, an aide to Deputy Prime Minister Kamal Thapa who is also the energy minister, told Reuters.
The government has also set up a panel to arrange for funds for the project, the energy ministry said in a notice, adding that the plant was expected to be ready in eight years.
The opposition Communist UML party, however, has said it would hand back the project to China if voted to power after elections that began on Sunday. Election results are expected next month after the second phase of voting on Dec. 7.
Nepal's giant neighbours China and India both vie for influence in the country and have been lobbying for infrastructure projects there.
Soon after the China Gezhouba deal was scrapped, India's state-run power company NHPC Ltd expressed its interest in bidding for the project to build the 1,200 megawatt (MW) plant.
Nepal's rivers, cascading from the snow-capped Himalayas, have vast, untapped potential for hydropower generation, but a lack of funds and technology has made it lean on India to meet annual demand of 1,400 MW.
Kathmandu has cleared a 750 MW project to be built on the West Seti River in the western part of the country by China's state-owned Three Gorges International Corp.
It has also permitted two Indian companies - GMR Group and Satluj Jal Vidyut Nigam Limited - to build one hydropower plant each, both capable of generating 900 MW of power each, mainly to be exported to India.