The government said the Viking project would become the third biggest wind farm in Scotland, driving an estimated £566m in capital investment and creating around 140 jobs during the five year construction period.
However, the wind farm will be smaller than originally planned after the government approved 127 wind turbines, but rejected proposals for a further 25 turbines that could have impacted flight procedures at Scatsta Airport.
"This wind farm will bring enormous benefits to the people of Shetland, generating more than £30m pounds annual income for the entire Shetland community," said Scottish Energy Minister Fergus Ewing in a statement.
"The development will create jobs and bring income, and makes the case for an interconnector to connect Shetland for the first time to the National Grid – paving the way for more exports and further renewable energy opportunities for the Islands, including community projects and marine energy developments."
He added that the government had taken extensive steps to minimise the impact of the wind farm on the local environment.
"The development includes an extensive habitat management plan covering around 12,800 acres, which will restore peatland and offer benefits to a whole range of species and habitats," he said.
The news comes on the same day as wind energy trade association RenewableUK issued a new charter designed to highlight the environmental and economic benefits that will result from continued investment in wind energy.