The fire, caused by a coal spoil heap, has been burning for almost nine years.
Developer Keele Homes has agreed to put out the fire, as part of its deal to build homes on land off Pepper Street, which links Keele and Silverdale.
Some local residents said the fire should have been left to die down by itself, without intervention.
Newcastle-under-Lyme Borough Council voted six to four, to approve outline permission at a meeting on Tuesday evening.
Councillor Wenslie Naylon said: "I'm very, very disappointed on behalf of many residents and a hard-fought case to turn this application down.
"We've lived with that fire for eight years. We've seen it change, we've seen it actually die down and the original recommendation was that it should be left to die down."
The area was mined for iron as early as 1680, with coal mining following about 100 years later.  Commercial mining stopped in 1998, two years after the spoil heap fire started.
Keele Homes said the council's decision would "boost availability of homes in the area as well as extinguish a fire that has been identified as posing a serious risk to the public".
Detailed plans for homes will now be put together and will require separate planning permission from the local authority.
Plans to build 100 homes on greenbelt land in north Staffordshire, near an underground colliery fire, have been given outline planning permission.