The project will involve the restoration of the Grade A listed Killeavy Castle and its outbuildings.
The castle was bought in 2013 by Jaramas Investments NI.
The firm is controlled by Mick Boyle, an Australian with family roots in the Killeavy area.
Invest NI Chief Executive Alastair Hamilton said the project represented "a valuable boost to the tourism infrastructure in the region".
"The development is expected to create over 80 new jobs in the Newry, Mourne and Down District Council area, in addition to the employment generated during the construction phase over the next two years," he said.
Mr Boyle said the intention is to create a distinct visitor attraction that maximises the heritage and beauty of the Killeavy Castle Estate.
The overall cost of the scheme will be about £10m with a plan to open in 2018.
Killeavy Castle started life as a country farm house, built in a gothic style by the Foxall family between 1810 and 1820.
In 1836, Powell Foxall commissioned the Dublin-based architect George Papworth to extend the building, adding four stone towers, outbuildings and Tudor-style windows.
The extended 4,000 sq ft house then became known as Killeavy Castle.
It sits on a 330-acre estate which backs onto the slopes of Slieve Gullion and includes a farm and woodland.
A plan to develop a luxury hotel and spa on the slopes of Slieve Gullion in County Armagh is to benefit from a grant of almost £1m from Invest NI.