Twenty-four units will be built at the gateway to Leura after an agreement reached between the developer and council.
Residents had opposed the complex, to be built on vacant land on the corner of the highway and the Mall roundabout. But a Land and Environment Court judge ruled it will have an "acceptable" impact on the heritage of Leura.
It is a ruling that has dismayed the National Trust. Local branch president, Rod Stowe, said: "This significant site deserves an outstanding design that is sympathetic to Leura's architectural heritage. In our view, this has not been achieved.
"The whole community should be alarmed by the court's finding that the impact of the development on the heritage significance of the area is 'acceptable'. This does not bode well for the future protection of heritage values in the Blue Mountains," he said.
The developer, HD Square Developments, originally proposed 34 units across three separate buildings with a swimming pool but this was rejected by a planning panel as too big and bulky and out of character with the heritage of the site.
The revised DA reduced the number of units and proposed a single chalet-style building.
Conditions have been imposed on the development, including that it not be used for tourist or visitor accommodation. There is also a detailed landscape maintenance plan.
But, as Mr Stowe pointed out, the developers will not be responsible for meeting those conditions - it will instead fall to the owners corporation.
"The branch is curious to know how the council intends to enforce some of the important conditions of consent... For example, compliance with the prohibition on use of the apartments for tourist or visitor accommodation and the stringent landscape maintenance requirements to be in place the 'for the life of the development' will not be the responsibility of the developers once the apartments are sold.
"Meeting these conditions will ultimately fall to the strata owners and is likely to prove problematic if not impossible."
A council spokeswoman said: "This site has long been zoned for medium density residential development. We are pleased the applicant was willing to compromise and meet council's demands for a smaller development, with an improved design and increased landscaping, which better complements our much beloved Leura village."
But the mayor, Mark Greenhill, was slightly exasperated with the process.
"About three years ago the state government took all councillors in the Sydney region out of DA processes, a decision I opposed because it takes an elected, community voice away from decisions that affect our villages," he said.
"This is a matter I would very much like to have been involved in. It is deeply frustrating to be forced to merely observe."