Two sections of the A3055 Undercliff Drive suffered landslips in February 2014, creating a three-mile detour between Niton and St Lawrence.
Some residents, frustrated with delays, resurfaced the road themselves in October 2014, but the council shut it again for safety reasons.
The authority says the new route will only be open for local access.
The landslide, which happened during work to repair the road, caused eight homes to be evacuated.
The council said the collapse was caused by unusually heavy rain in an area of "known land instability" where there had been numerous landslips in the past.
The authority's planning committee has approved a new route, slightly inland, providing full access for local residents' vehicles, walkers, cyclists and horse riders, but closed to through traffic.
The work will be carried out by the authority's contractor Island Roads under an existing Private Finance Initiative (PFI) deal.
The company said the work would last eight weeks.
Resident Tim Wright said the solution was a "temporary scheme" which failed to address drainage problems.
The council said "retaining the existing drainage arrangements for the highway would not increase the potential for ground movement to occur".
Planning chairman Bob Blezzard said he hoped in the future there would be another application for the road to be "fully reinstated".

Gatland says Henry indicated to his players at the outset of the trip of Australia who would be selected for the Test matches.
He says that meant his compatriot "lost half the team on day one".
"The players knew straight away what was the Test side and who was making up the numbers," said the New Zealander.
Gatland, who on Wednesday named his side to face the Provincial Barbarians in the tour opener on Saturday, says each of his 41-man squad is in contention to face the All Blacks.
"Keeping harmony in the squad is paramount," he said. "It's about giving everyone an opportunity.
"It's important these guys feel like they are putting themselves in the shop window and have a chance to prove themselves, and with a little bit of luck are in contention for the Tests.
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Owen Farrell and Johnny Sexton appear to be in competition for the fly-half spot after Gatland reiterated he sees the Englishman as a "world-class 10", rather than a centre.
Irishman Sexton starts on Saturday, with Farrell on the bench.
"The players are pretty aware about the competition in that position," Gatland said. "Johnny gets a start on Saturday, and the other two [Farrell and Dan Biggar] will get a start in the next two games."
Gatland's son Bryn will start for the Provincial Barbarians at fly-half.
"I spoke to Bryn last night and he's enjoying the week," Gatland Sr said. "We'll catch up tomorrow, and he'll expect to have to make a few tackles on the weekend.
"We haven't spoken too much about the game but he's excited about the opportunity."
A main road on the Isle of Wight is to be repaired more than two years after it collapsed due to heavy rain.
[NEXT_CONCEPT]
British and Irish Lions head coach Warren Gatland says he will not repeat Graham Henry's 2001 mistake by splitting the squad early in the tour.