Kindergarteners use trailers that parents say are unsafe, and have unreliable heat and mold.
The long-awaited deal will create additional school seats for West Village and Greenwich Village kids.
The DOE and the District 30 CEC will approve a zoning plan for the new school sometime this fall.
The class will open 25 extra kindergarten seats at the school, which has seen an influx of new families.
Current gifted students will be granted spots at a new program that will launch next year at I.S. 126.
Gifted students at P.S. 166 are the only ones in district 30 without an automatic middle school transfer.
The city will build an addition at crowded P.S. 11, which has used portable classrooms for over a decade.
Two news schools, P.S. 312 and I.S./H.S. 404, will open in Hunters Point in September 2013.
The Peck Slip School will now offer 712 elementary seats, 56 more than had been announced in November.
The decision to downsize a new public school near Union Square was driven by fears that angry residents would sue the city.
Residents and community board members are locked in a battle over a new school on East 15th Street.
There are 350 to 370 seats available in P.S. 1 and P.S. 126, a Department of Education official said.
The plan proposes cutting thousands of previously planned public school seats.
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