A pub's plan to create a new outdoor dining area has been approved despite backlash from neighbours who claim it will negatively impact their mental health.

The London Hotel in Paddington, Sydney, announced its $50,000 development which would see tables and chairs set up outside in a purpose-built 'parklet'.

Opening this new 7.5-metre-long area is aimed at boosting late-night dining and will coincide with the pub's 150th anniversary after it was founded in 1875.

Woollahra Council approved the pub's 'parklet' and its extended operating hours which will see diners served until 11pm.

Supporters and opponents of the new space attended the three-hour meeting, which resulted in a list of more than 70 conditions which the pub agreed to.