"The World Trade Center site will forever hold a special place in our city, in our hearts," Bloomberg said.

"But we would be untrue to the best part of ourselves, and who we are as New Yorkers and Americans, if we said no to a mosque in lower Manhattan."

The vote was a setback for opponents of the mosque, who say it disrespects the memory of those killed on September 11.

Controversial issue

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Building of an Islamic cultural centre near New York's 'Ground Zero' is approved

The American Center for Law and Justice, a conservative advocacy group founded by the Rev. Pat Robertson, announced it would challenge the panel's decision in a state court on Wednesday.

The proposed mosque has emerged as a national political issue, with prominent members of the Republican party like vice presidential candidate Sarah Palin to former House of Representatives Speaker Newt Gingrich voicing their opposition.

The mosque is being developed by a group called the Cordoba Initiative.

The group says on its website that its goal is to foster a better relationship between the Muslim world and the West, "steering the world back to the course of mutual recognition and respect and away from heightened tensions".

A partner in the project, SoHo Properties, bought the property for nearly $5 million.

Early plans are aiming a 13-storey, $100 million Islamic centre.