The cabinet of ministers had approved a proposal by economic development minister Basil Rajapaksa to lease the 450 islet for 99 year to Sapphire Bay Resorts (Pvt) Ltd, he said.
The islet called Uchchimunai off Kalapitiya north of Sri Lanka's capital Colombo is among several state-owned that have been offered to foreign investors.
The firm is expected to build a resort with hotels, water villas and a golf course on the islet.
Sri Lanka has seen a tourism boom with the end of a 30-year war in 2009 with 855,000 tourist coming in 2011.
This year arrivals are expected to top one million.
Corrected up front payment Rs,1,070mn