Lawyers believe it is the first time an employer has accepted liability in a British court for stress-induced injury.
Beverley Lancaster, 44, from Sutton Coldfield, West Midlands, sued Birmingham City Council after falling ill with depression and becoming too demoralised to continue working as a housing official in a neighbourhood office.
Frances Kirkham, the city's county court assistant recorder, said she accepted that Mrs Lancaster's job had led to her psychiatric illness. The pounds 67,491 compensation covers loss of wages, future loss of earnings and present and future prescription charges.
The court heard how Mrs Lancaster had an exemplary work record for 21 years until 1993, when she was moved from her position as draughtsman to be a housing officer at Sutton Coldfield Neighbourhood Office. Her workload increased, she worked without the administrative support given to others in the same position and for almost a year she did the work of two people while the council failed to fill a vacancy. Her problems were compounded, the court heard, by public contact, which was often intimidating and abusive.
Her barrister, Kevin O'Donovan, said: "It was so totally different she did not cope at all."
The stress forced Mrs Lancaster to take long bouts of sick leave until she was retired on medical grounds in 1997. Her psychiatrist, Dr Alfred White, said Mrs Lancaster had developed depression and a severe state of anxiety.
Yesterday Mrs Lancaster told of how she felt she was "being buried under a mountain of paperwork" and that Sunday nights before work left her with "an impending feeling of doom in the pit of my stomach". She said: "It was like a downward spiral - it made me feel like I was in a hole with no key to open the door. I would break down in tears.
"I was expected to be a Jack-of-all-trades and not shown how to do the job properly. I was given a position but never received the training to be able to carry it out properly."
The case has important ramifications for a host of similar work-related stress claims.
Unison, the public service union, said it had set a precedent, in that stress could now be viewed in the same terms as a physical injury. Unison's chairman of legal services, David Cooper, said: "Initially it was quite difficult to bring the case to court because people are quite dismissive of stress at work. But now employers know that if they damage the minds of their employees, they will have to pay out in the same way as if they did not repair the stairs and someone fell down and broke a leg."
The TUC has said more than 460 cases are currently before the courts and Unison says it is investigating up to 7,000 complaints of stress among its 1.3 million members. Recent estimated put the annual cost to British industry of days lost to stress at pounds 6.4bn.
The mental health charity Mind said the decision served as a warning to employers.
Just Another Day at The Office for Mrs Lancaster
8am: Arrives at Sutton Coldfield Neighbourhood Office. There was no job share cover last Friday so up to 20 cases were left outstanding over the weekend. Paperwork covers anti-social tenants and homelessness.
8.30am: Office opens for telephone calls. Mrs Lancaster's direct line rings every four to five minutes. She cannot complete casework because she has no assistant to answer calls. Is abused on the phone by angry caller.
9am: Front counter opens to callers. Mrs Lancaster has a queue of about a dozen tenants to see before office shuts at 1pm. Deals with homeless first. "They were usually pretty frustrated and became quite vicious."
1-2pm: Appointments each take up to half-an-hour. Mrs Lancaster misses lunch.
2.15pm: Cup of tea.
2.30-3.45pm: Council priority is to re-fill empty homes. Mrs Lancaster has appointment to show a family around a house. No assistant housing officer to complete letting contract so she does the work.
4pm: The 20 "overnight" cases still unfinished and now Mrs Lancaster must deal with the day's mail of about a dozen inquiries from local MPs, Citizens Advice Bureau, complaints, requests for repairs, arrears and internal mail from housing director.
5.15pm: Phones stop but work still outstanding so again Mrs Lancaster asks childminder to stay on.
6.30pm: Leaves work.