The measure "will allow for the orderly wind-down of the insolvent airline Air Berlin without unduly distorting competition in the single market", the Commission said.
Air Berlin filed for insolvency in August after its main shareholder, Abu Dhabi's Etihad Airways, withdrew its financial support.
Germany then notified the Commission of its intention to grant a bridging loan to allow Air Berlin to continue operations in the coming months while it sells its assets. At the end of the process Air Berlin is expected to cease operating and exit the market.
"Rescue and restructuring aid are among the most distortive types of state aid and can only be granted to companies once these have exhausted all other market options," the Commission said.
The decision takes account of the fact that the loan will be paid out in instalments under stringent conditions, it said.
"In particular, Air Berlin has to demonstrate its liquidity needs on a weekly basis and new instalments will only be paid when all existing liquidity has been used," the Commission said.
Germany has also committed to ensure that either the loan will be fully repaid, or Germany will submit a winding down plan for Air Berlin.
Privately owned German airline Germania has lodged a complaint with a court in Berlin over the loan, in a case that will be heard on 15 September.
Ryanair has also argued that the government loan and negotiations with Lufthansa are an attempt to "carve up Air Berlin’s assets, while excluding major competitors and ignoring both EU competition and state aid rules" and called for the Commission to take "immediate and decisive" actions.
State aid expert Charlie Haggerty of Pinsent Masons, the law firm behind Out-Law.com said: "The Commission’s application of the rescuing and restructuring guidance shows that state aid can be applied to help wind up companies in difficulty in an orderly manner, in this instance minimising disruption to travellers. However, the challenge to this measure by competitors may mean that the Commission and Germany could face further scrutiny on the winding up of Air Berlin later on in this process."