Auckland Castle has been awarded £9m from the Heritage Lottery Fund to build a museum extension.
The two-storey extension will house 11 galleries that will explore the history of faith in Britain.
State rooms at the historic home of the Bishop of Durham will also be renovated.
Auckland Castle Trust said the project will create up to 130 jobs.
The castle work is part of a major regeneration project for Bishop Auckland town centre.
Source: bbc.co.uk