The grant-maker, formerly known as the Big Lottery Fund, launched the review in December, after an article in The Sunday Times criticised its decision to fund the charity.
Mermaids supports young people who are experiencing gender dysphoria, a condition in which the person feels they have been born into a body with the wrong gender, and is campaigning for children to have support in schools and the healthcare system.
The article said that the charity, which was offered the £500,000 grant to develop a nationwide network of 45 groups across the country over the next five years, had been accused of bullying doctors, promoting falsehoods and using "emotional blackmail" to pressure parents to support life-changing medical interventions for their children.
Many of these concerns were echoed in complaints received by the NLCF after it announced its plans to the review the grant, the decision document said.
In a statement released today, the NLCF said: "Following public interest regarding the proposed grant to Mermaids UK, the NLCF undertook a review of a number of concerns expressed in relation to the charity.
"This review did not find any grounds to withhold funding from Mermaids UK. The grant has therefore been approved by the England Funding Committee.
"As part of our grant management process, we will work closely with Mermaids UK to ensure they are supported in their development."
But the review identified some areas in which Mermaids should improve its "practice, governance, relationship management and quality assurance" and said the NCLF would work with the charity to help it do so.
"Mermaids is an organisation which is developing and maturing fast within a complex environment," the report said.
"As it moves to an operating approach which is a partnership between young people, their families and professionals, it is experiencing challenges and must further consider the robustness of its governance and infrastructure."
It warned that the charity’s engagement in controversial debates risked "overshadowing" the support they provided for children, young people and their families.
But it added: "Given the historic lack of funding and the estimated size of the trans-community, this is an important area to fund. The Big Lottery Fund is a funder for everyone, this community, which is also a marginalised community, is an appropriate destination for our funding."
In a statement on its Facebook page, the charity said it warmly welcomed the decision.
"We are grateful to the fund for conducting the review in a detailed, thorough, fair and appropriate manner," the statement said.
"Mermaids will now be able do more to improve outcomes and experiences for transgender and gender-diverse children and young people.
"During the review, Mermaids was overwhelmed by the support received from our current funders, organisations and individuals. The messages of support and solidarity have been incredible and have been appreciated by the families that we help and all of our hard-working volunteers, staff and trustees."