The Duddy Group is investing £7million in the project which is being supported by Invest Northern Ireland and the Department for Communities.
The hotel will have 116 bedrooms, a Marco Pierre New York Italian Restaurant, two meeting rooms and three retail units and will provide accommodation for up to 40,000 visitors a year.
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Invest Northern Ireland's Chief Executive Alastair Hamilton said: "This new hotel will address a gap in provision of budget hotel accommodation in Derry by offering a three-star quality option for visitors.
"The economic benefit also includes the creation of 47 jobs as well as employment generated during the construction phase and the ongoing benefit to the local supply chain through the purchasing of consumables for use in the hotel."
The new hotel will be located on the corner of Strand Road and Great James Street, not far from the Peace Bridge and close to other key tourist sites such as the Guildhall and the City Walls.
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