The government has given the green light to a fifth terminal at Heathrow and left the door open on a third runway at the airport.

Despite intense local opposition to the move, the transport secretary, Stephen Byers, told MPs of his decision on Tuesday.

"The decision that gives the go ahead to the fifth terminal is essential if we are to maintain Heathrow as one of the world's leading airports," said Byers.

He said that the controversial fifth terminal would "deliver wider benefits for London and the country as a whole".

Byers said a decision to block the new terminal would have given the competitive edge to airports such as Amsterdam's Schiphol and Paris' Charles de Gaulle.

Following a four-year public inquiry, the embattled minister said that the new terminal must meet certain strict conditions.

To calm local opposition, the number of flights will be restricted to 480,000 to meet concerns about noise - a rise on the 460,000 that were handled last year.

Under the new guidelines, the total number of passengers passing through Heathrow will increase to around 90 million a year - a 25 million rise on current levels.

There will be consultation on stricter controls on night noise, which will be completed by 2003 at the latest. Byers also announced plans to extend the area which limits noise pollution to 57 decibels as a condition of the new terminal.

New research into public attitudes to noise pollution will also be carried out, he told the Commons.

As a further condition, Byers said that the "westerly preference" for night flights would be addressed in order to restrict air traffic over built-up areas to the west of the city.

Byers said he had also insisted on the extension of the Heathrow Express and London Underground's Piccadilly line before the new terminal opens.

To limit congestion in the area, a maximum number of 42,000 new car parking spaces is to be imposed. The transport minister also said it would be "inappropriate" to widen the M4 at junctions close to the airport.

While he expressed regret at the length of time it has taken to reach a conclusion, he said it had been vital to "ensure proper scrutiny" of projects which could have a major environmental impact. But he admitted: "Terminal five is a lesson in how not to plan projects that are in the national interest."

The planning inspector's report was submitted to his department on December 20, with the delay in its approval being caused by revisions to the development by Heathrow's owners, the British Airports Authority (BAA), said Byers.

Responding to the statement for the Conservatives, shadow transport minister Eric Pickles said "This has been eight years in the making, £84 million in the cost."

He dismissed the decision as "the last hurrah of a cumbersome planning system".

Pickles said that the report from the planning inspector had sat "gathering dust" on Byers' desk for the last 12 months.

He said that the planning process should be "streamlined but must not lead to a stifling of debate".

Liberal Democrat transport spokesman Don Foster said his party was opposed to the construction of Terminal Five, but added his party hoped the commitments the government is seeking from BAA will reduce the "distress felt by tens of thousands of people affected by aircraft noise and congestion".

"Heathrow is the noisiest international airport and the air quality of the surrounding area is about the worst in London. The government will have failed if, as a result of the constraints they have imposed on BAA, noise levels do not drop and air quality does not improve," said Foster.

John McDonnell, the Labour MP for Hayes and Harlington, said the move represented "an error of judgement".

"What has happened is that my constituents have sacrificed their environment for the aviation industry and the British economy and I think they should be protected and compensated," he said.

McDonnell criticised Byers for not ruling out the possibility of a third runway - arguing that the aviation authorities will begin lobbying for it "within days".

The Conservative MP for Uxbridge, John Randall, said that he was prepared to accept that the decision was in the national interest.

"I think he [Byers] could have imposed conditions about night flights, especially baring in mind the European Court of Human Rights ruling. He's not really conceded much there but hopefully he will look at that. I also would have liked to have seen a restriction on the third runway which I would be opposed to," he said.

Byers' decision was welcomed by airlines and business. BAA insisted that the fifth terminal was vital if Heathrow was to continue as a main European hub for long haul travellers.

The CBI also welcomed the decision, saying it was "great news" for UK business.

The director of business environment for the CBI, Michael Roberts, said: "Business has been crying out for this decision so, at long last, this is great news. But Terminal Five must be allowed to operate in a way that meets the needs of passengers and airlines as the UK competes in a fierce global market.

"Clearly there are local impacts to be resolved but it is important that the right balance is struck. The conditions attached will have to be studied carefully to see if they achieve that balance," he said.