The cash will enable 1,000 local people to chronicle life in the city during Dickens' era and compare it with life today.
Residents will work with artists, playwrights, photographers and film-makers to create a unique exhibition at the city museum and the Dickens Birthplace Museum, in Old Commercial Road.
The exhibition would be the centrepiece of Portsmouth's celebration in 2012 to mark the bicentenary of the author's birth.
Dr Jane Mee, museum and records manager, hopes to get the original manuscript of Oliver Twist displayed at the city museum.
She said: 'It's all about getting people excited about archives. It's about getting people interested in their own family history.
'These documents have stories that are quite graphic about the squalor and disease in the city in Dickens' time.
'These stories come to life once you get into archives.'
Portsmouth City Council's bid has now passed the first round of acceptance from the Heritage Lottery Fund and city leaders are 'quietly confident' it will be given final approval next year.
David Williams, Portsmouth City Council's chief executive, said: 'It is great news that the Heritage Lottery Fund has given a green light to the Dickens Community Archive project that aims to get people across the city working on family and community archives and sharing what they find with others.
'People who want to can then go on to work with the city archives - which vividly bring to life some of the issues Dickens explores in his novels - to see what they say about life in Portsmouth at the time he was writing.
'The project website and exhibition at the city museum to celebrate the bicentenary of Dickens birth in 2012 will showcase their work.'
The exhibition would touch on themes such as childhood, education, philanthropy, poverty and industrialisation and how these aspects have changed more than a century later.
It might compare the pickpockets, press gangs and rowdy beer houses famous in 19th century Portsmouth with the ultra-modern symbols of the city today such as the Spinnaker Tower.
Councillor Lee Hunt, who is in charge of culture in Ports- mouth, said city schoolchildren would get involved.
He said: 'The screen at the Guildhall will have displays so across the city people know we are celebrating Dickens.
'We are going to go Dickens-mad.'
LIFE AND TIMES OF CELEBRATED SONCharles John Huffam Dickens was born in a modest house in Landport on February 7, 1812.
The house has miraculously survived and is now preserved as a museum furnished in the style of 1809, which is when John and Elizabeth Dickens set up the first home of their married life there.
John Dickens came to Portsmouth when his job in the Navy Pay Office was transferred from London.
The family stayed until 1815 when his job demanded that he return to London.
Charles Dickens lived in Portsmouth for the first three years of his life and returned to the town on three occasions.
Once he returned to research background information for his novel Nicholas Nickleby and later in life, when he was a famous writer, to give public readings of his work.
On his last visit in 1866 he tried to find his birthplace but was unsuccessful. However it is now clearly signposted.
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