"Acquisition of Lafarge by Holcim is subject to conditions. The merger can proceed," EU Competition Commissioner Margrethe Vestager said on Twitter, adding the move was "good for growth".
The European Commission said it allowed the merger to go ahead on condition that Lafarge divest businesses in Germany, Romania and Britain and that Holcim do the same in France, Hungary, Slovakia, Spain and the Czech Republic.
Holcim and Lafarge announced in April they were merging to create the world's biggest cement group worth 40 billion euros ($55 billion), with an eye on booming construction in emerging markets.
The deal, a major event in the global construction industry, is based on the offer of one Holcim share for one Lafarge share.
The new company will be called LafargeHolcim and "will have a unique position in 90 countries and will be evenly balanced between developing countries and countries with strong growth," the firms said in a joint statement.
They highlighted the match of their activities since Lafarge has a strong presence in Africa and Holcim in Latin America.
However, they both have big and competing interests in Europe.
The European Commission said it had had concerns that the "transaction, as originally notified, would have" hurt competition in many markets in Europe but that the two companies later "committed to divesting most of the operations where their activities overlap".
"With the remedies, we have ensured that the creation of an increased global footprint of the group will not come at the expense of competition in the EU," Vestager said in a statement.
"And this is the positive example today's approval provides to other companies that may have global ambitions," she said.
The Commission added that the two firms will not be allowed to complete their deal until it has approved the companies who will buy the assets put up for sale.
Figures showed that the new giant will employ 136,000 people, and have annual sales of 32 billion euros and underlying profits of 6.5 billion euros.
The deal would generate economies of scale of 1.4 billion euros over three years.
LafargeHolcim will be in a powerful position as a supplier of cement, a key basic material in construction.
Building supply companies have been expanding in emerging countries where they see huge opportunities for growth as they face sluggish conditions in the European construction industry.
Shares in the new firm will be listed on stock exchanges in Paris and Zurich.
"We welcome with great satisfaction the commission's positive decision," said Wolfgang Reitzle, the future chairman of LafargeHolcim, and Bruno Lafont, the future chief executive officer, in a joint statement.
"Thanks to this approval, we remain more than ever on the right path to finalize the merger in the first half of 2015."