The medieval castle was a once a huge structure dominating the South Yorkshire city but it was demolished during the Civil War.
The site was covered over in the 1960s by the notoriously drab Castle Markets development and the only visible remains of the ancient castle were locked in basements under the concrete structure.
Over the past few years the whole of the Castlegate area of Sheffield has undergone redevelopment, including the demolition of the markets.
On Monday, Sheffield City Council announced an £800,000 revamp of the Castlegate Quarter which will include a fresh dig on the castle site.
The move will also see work on the Old Town Hall - a 200-year-old building which housed the city’s crown court until the 1990s but has been derelict since.
The council said the work being undertaken will also link with proposals to uncover the culverted River Sheaf, which runs under Sheffield and gave the city its name.
Martin Gorman, chairman of the Friends of Sheffield Castle, said: “This is fantastic news, and we are excited that work to excavate the remains of Sheffield’s medieval castle will begin soon.
“We look forward to working alongside the council, archaeologists and the two universities to maximise public engagement and interest in the castle, as the finds are revealed and interpreted.”
The £786,000 funding is aimed at transforming the area over the next 18 months, the council said.
It plans to develop a vision of the future of Castlegate, revealing its hidden history but also promoting it as a location for start-up tech and creative enterprise.
The area is the oldest part of Sheffield but became run down over the last couple of decades.
As well as the castle site and the Old Town Hall, the quarter is home to a number of other landmark buildings which have seen better days.
These include Castle House Co-op store, the former Sheffield Stock Exchange, the former Hancock and Lants stable building and Canada House.
Mazher Iqbal, council cabinet member for business and investment, said: “This package of projects demonstrates the importance we place on the future of Castlegate as a key part of the city centre economy and in the partnership which has come together to achieve it.
“Castlegate is a major gateway into the city centre, but at the moment it doesn’t reflect the incredible regeneration happening elsewhere in the centre, such as The Moor and Sheffield Retail Quarter.”