The initial stage of improving the 150-year-old venue will begin in January and the club will fund the £12m cost itself.
The County Suite, Tyldesley Suite and the front of the ladies stand, from the Pavilion to the media centre, will be replaced with a 1,000-seater function room, which can be split into three. It will double up as a hospitality suite for England Test matches.
The club is in talks with Trafford council, Ask developers and Tesco about a sports-led redevelopment of the area which will see the rest of the ground revamped along with land stretching from the Old Trafford Metrolink station to Salford Quays. The plan also involves Trafford Town Hall and a possible relocation of Trafford council.
Lancashire will not know how much it will have to spend on the rest of the ground until later this year at the earliest, but this first phase will take just over a year, with April 2010 the scheduled completion date.
Lancashire chief executive Jim Cumbes said: "We knew it would take time to finalise the overall development so we thought we had better show willing to the ECB and our own Club Members by making the first steps. We are talking to the bank about funding. If we realised our dreams of a new or improved hotel, and complete redevelopment of the ground, it would probably cost around £70m."
The club are also spending around £1m on a new outfield and a new state-of-the-art replay screen for 2009, while permanent floodlights will be built as part of the overall development.