Plans to restore one of London's most recognisable landmarks have been given the go-ahead today by the city's mayor, Boris Johnson.

The £5.5bn redevelopment of Battersea power station in south London, which has been derelict since its closure 27 years ago, will entail the construction of thousands of homes and shops. It will also bring closer an extension of London Underground's Northern line.

It will mean the creation of up to 25,000 jobs – 15,000 of them within the power station building – and the overall construction of 16,000 homes.

The grade-II listed building, which featured on the cover of Pink Floyd's Animals album, has stood empty since it was decommissioned in 1983 as a number of plans to redevelop the 40-acre site failed.

The redevelopment proposal has been put forward by the company Real Estate Opportunities (REO). It includes a commitment from the developers of more than £200m towards funding a two-station extension of the Northern line from Kennington.

Johnson said: "Battersea power station has long been an iconic feature of the capital's skyline, and these plans will make sure that status is retained for years to come.

"The building was once a vital motor helping to power the capital. With its future secured through this regeneration, it will once again play a part in driving London's economy."

The plan now needs the approval of Eric Pickles, the secretary of state for communities and local government.

Rob Tincknell, director of REO, said: "I am delighted that the mayor of London has supported the redevelopment of Battersea power station, bringing us even closer to delivering the regeneration of one of London's most iconic landmarks.

"We now look forward to the application passing to the secretary of state for communities and local government for final consideration."

The firm said it hopes to begin construction on the first phase of the development in early 2012, and to complete it in 2016.The remaining phases, including the new underground station that will follow, are scheduled for completion in 2024.