The Competition and Markets Authority (CMA) said in a statement that the tie-up will proceed after the companies pledged to invest billions of pounds on rolling out a high-speed 5G network across the UK.
The planned tie-up, first made public in June last year, is valued at around GBP 16.5 billion ($21 billion) by Vodafone and Three, which have 27 million customers combined.
The merger, set to complete during the first half of next year according to Vodafone, vaults the new group above the UK's two current largest mobile operators BT EE and Virgin Media O2 in terms of customer numbers.
"We believe the merger is likely to boost competition in the UK mobile sector and should be allowed to proceed -- but only if Vodafone and Three agree to implement our proposed measures," said Stuart McIntosh, who led the CMA inquiry on the merger.
Vodafone said the enlarged group will create "a new force in UK mobile, unleashing more competition and investment to transform the UK telecoms landscape".
Vodafone and Three "have committed to invest GBP 11 billion to create one of Europe's most advanced 5G networks", the pair said in a separate statement.
The new network will reach 99 percent of the UK population and benefit more than 50 million customers as demand for data "is set to accelerate further with more widespread adoption of new technology, such as AI", it added.
Vodafone chief executive Margherita Della Valle said the "approval releases the handbrake on the UK's telecoms industry, and the increased investment will power the UK to the forefront of European telecommunications".
Canning Fok, deputy chairman of CK Hutchison, said his group "will fully support the merged business in implementing its network investment plan".
- Transformation -
Vodafone was already transforming under Della Valle amid the ongoing sale of its Italian unit to Swisscom for eight billion euros ($8.4 billion) and offloading of its Spanish division to investment fund Zegona for up to five billion euros.
It comes after the British group last year axed 11,000 jobs, or more than 10 percent of its global workforce, to slash costs.
Vodafone's main market is Germany, where the group has been hit by legislation in the country that prevents housing associations from bundling TV contracts with rent.
Mobile phone groups also provide television streaming services.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, described the UK's approval of the Vodafone-Three merger as "a significant regulatory shift after years of blocked telecom deals".
Following the CMA announcement, Vodafone's share price rose 2.5 percent at the end of trading on London's top-tier FTSE 100 index, which closed higher overall.
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