There was controversy earlier this year over plans to move it to Portsmouth.
However, Arlene Foster MLA, NI Minister for Enterprise, Trade & Investment, has said the ship is to stay, adding "an important part of Northern Ireland's maritime history was secured".
Mrs Foster said the the National Heritage Memorial Fund (NHMF) had pledged £1m to help to restore the warship.
The announcement was made at the Imperial War Museum as part of a programme to mark the centenary of World War I.
HMS Caroline, the last surviving warship of the Battle of Jutland, has been berthed at Alexandra Dock in Belfast since 1923.
It is hoped that the restoration work will be completed by 2016, so the ship can be opened to the public in time for the centenary anniversary of the battle.
Speaking today, Mrs Foster hailed the outcome of those talks as "great news" and said she was "very pleased that our collective efforts have played an important part in ensuring HMS Caroline's future is in Belfast".
Mrs Foster said the ship had the potential to become a "must-see attraction".
"HMS Caroline is part of the fabric of Belfast and she is also an integral part of our maritime history," she said.
"The ship is of outstanding national significance and HMS Caroline has huge potential as a visitor experience as she is listed on the National Register of Historic Vessels."
The Minister's department has set aside up to £100,000 this year for "remedial work" on HMS Caroline and is also in talks with the Heritage Lottery Fund.