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The decision is a blow for Blackpool and London's former Millennium Dome, which were the bookmakers' favourites.
The licence will allow Manchester to build a venue for up to 1,250 unlimited-jackpot gaming machines.
Meanwhile, licences were granted for new 'large' casinos to Great Yarmouth, Hull, Newham, Middlesbrough, Solihull, Milton Keynes, Leeds and Southampton.
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The Casino Advisory Panel also granted licences for 'small' casinos to Bath and North East Somerset, Dumfries and Galloway, East Lindsey, Luton, Scarborough, Swansea, Torbay and Wolverhampton.
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The super-casino would be based at Sportcity in the Beswick area, close to the City of Manchester Stadium in the east of the city.
The proposed site will also contain an entertainment complex with a range of facilities such as a multi-purpose arena, a swimming pool, an urban sports venue, restaurants, bars, a nightclub and a hotel.
MPs have final say
Culture Secretary Tessa Jowell said MPs would be given the final say - via a Commons vote - on the proposals.
Manchester was a 16-1 outsider at the bookmakers to be selected as a test-bed for the UK's first regional 'resort' casino.
There has been speculation that more super-casino licences might be awarded but Ms Jowell told MPs that there would definitely be no more granted during this Parliament.
Any further casinos would have to be approved by parliament and would not be considered until there had been a 'proper evaluation over time' of the social and economic effects of the 17 new casinos.
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She said: 'Las Vegas is not coming to Great Britain... British casinos will be subject to new controls, which will be the strictest in the world.'
Stephen Crow, chairman of the independent Casino Advisory Panel, said Manchester had been chosen because of its 'very thorough consultation' with the local community and 'the way it dealt with questions of problem gambling'.
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'Manchester has a catchment area for a casino second only to that of London, and it is an area in need of regeneration at least as much as any of the others we observed,' he added.
Professor Crow told BBC News 24 the panel's decision was 'watertight' if it came to a legal challenge from any losing bidder.
Councillor Richard Leese, leader of Manchester City Council, said: 'This is fantastic news for Manchester, and the region.
'Smack in the face'
'Manchester has an unrivalled track record in the delivery of major regeneration schemes so we are confident we have the expertise to deliver a world-class venue, creating thousands of new jobs for local people.'
However, Doug Garrett, chief executive of ReBlackpool, the urban regeneration company which worked on the town's bid, called the decision a 'smack in the face'.
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'It is tragic. It is very difficult to see how they have drawn their conclusions,' he added.
Previous assessments had put Manchester at the bottom of the seven bidders, while all local government bodies and regeneration agencies in the region had backed Blackpool, Mr Garrett said.
'It is a very strange decision. We need to look into the rationale. Manchester has come from nowhere. It was a real, real dark horse,' he added.
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A spokesman for Dome bidders AEG said: 'We are very disappointed that the London Borough of Greenwich has not been recommended as the location for the first regional casino.
'We are taking time to examine the findings in full and considering our position.'
Entertainment complex
Manchester's bid organisers said it would regenerate a poor area in the east of the city, promising a £265m investment and 2,700 direct and indirect jobs.
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Conservative leader David Cameron said: 'It was the right decision that it went to the north of England and actually it's going to have a regeneration impact.
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'I've nothing against Greenwich at all, but, after all, London did get the Olympics and so I think that either Manchester or Blackpool... probably made more sense.'