The money for Bridgwater Community Hospital is part of the coalition's £330m investment for new NHS facilities across England.
Once built, the new hospital will have 30 inpatient beds, a midwifery-led maternity unit, a minor injury unit and X-ray and space for mobile scanners.
The current hospital was built in 1813, but it has become cramped and outdated.
The total cost of the project is £33m and the remaining balance will be paid for by NHS Somerset and Somerset Partnership NHS Foundation Trust.
Matron Sue Taylor said: "It's very old and in the summer it's very, very hot. In the winter it's quite cold, there's lots of maintenance, lots of running repairs - it's a poor old tired building now.
"Sometimes your environment can have such an impact when you're trying to recover from an illness - we make the best of what we've got but when you walk into a new build it just lifts you and gives you that feeling of well-being.
"There is a real lovely feel about this hospital and for many years it's served us well, but we need something more modern."
In the past five years, three out of Somerset's 13 community hospitals have been replaced.
Work has also got under way on the new Jubilee Building at Musgrove Park Hospital in Taunton.
Dr Donal Hynes, a Bridgwater GP and medical director at Somerset Primary Care Trust, said: "It will make a huge difference for me and my relationship with my patients.
"This is a great vote of confidence of the developments that have been achieved in Somerset where GPs, nurses, and therapists have got together to deliver a whole package of care that can be delivered in a one-stop shop setting."
Somerset PCT hopes to build the new hospital on land at Bowers Lane, which will depend on planning permission.
The aim is to get the hospital finished by autumn 2014.

There were concerns about the stability of the building, which has been derelict for years, after the collapse of an internal wall last week.
Contractors began work on Friday night.
The Environment Minister Alex Atwood recommended the demolition in the interests of public safety.
Mary O'Dwyer, Chair of Foyle Civic Trust, said a strategic approach is needed for the future protection of heritage in the city following the demolition.
"Many of our members believe that this is a very sad event.
"The factory is part of our industrial heritage and more should have been done to save it.
"Others believe something had to be done because it was a health and safety issue," she said.
"We would like to see a consensus and a strategic vision of all of the organisations in the city that have a remit for protecting our heritage."
Foyle Road, which was closed between the lower deck of the Craigavon Bridge and John Street roundabout, has reopened.
A community hospital in Somerset is to be replaced and rebuilt with a £16m grant from the government.
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The former Hamilton's shirt factory on Foyle Road in Londonderry has been demolished.