The proposal has sparked a bitter public fight begun more than seven years ago.
The wind farm's foes, including Sen. Edward Kennedy, D-Mass., argue it will harm the environment and hurt the tourism and fishing industries.
But the new Minerals Management Service report said developer Cape Wind Associates' plans pose no major environmental problems.
Various federal and state agencies have been reviewing the proposal for 130 windmills across 25 miles of federal waters in Nantucket Sound since 2001.
Supporters say it will provide cheaper energy, reduce pollution and create green jobs.
The new Obama administration will decide the project's fate. President-elect Barack Obama, who wants to double alternative energy production over the next three years, was visiting an Ohio company that makes parts for wind turbines on Friday. He takes office Tuesday.
"We're handing off to the next administration," said Minerals Management Service director Randall Luthi. "It is up to them to decide."
Cape Wind has pitted two of the most powerful politicians in Massachusetts against each other. Both are strong Obama supporters.
Kennedy, whose family's Hyannis Port compound would have a clear view of the farm, has tried to derail the project in Congress, citing risks to fishing, navigation, aviation and the sanctuary of Nantucket Sound.
Massachusetts Gov. Deval Patrick, a close Obama ally who wants his state to be a leader in alternative energy, has been a strong Cape Wind backer.
The developers, who have estimated the project's cost at $1.2 billion, hope the wind farm will be operational by the end of 2011. They say it could provide up to 75 percent of Cape Cod's power demands.
Cape Wind has sparked controversy since it was proposed more than seven years ago. The turbines would stand 440 feet above sea level when the tallest blades are pointing straight up.(Cape Wind Associates)
A computer-simulated image provided by Cape Wind Associates of the view off Cape Cod after construction of the proposed wind farm.
The report's conclusions were welcomed by supporters who see the wind farm as a safe, clean way to create renewable energy and new jobs.
Opponents vowed to continue their fight, accusing the government of overlooking environmental, safety and other problems as officials rushed to approve the project before the Bush administration departs.
The Minerals Management Service must wait at least 30 days before issuing its final decision on the project. That order will include a decision on whether to issue a lease, Luthi said. Approval would set the stage for Cape Wind to seek a federal lease for the project to be located in federal waters.
Both sides predict legal challenges whatever the government decides.
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