Nissan is to build a new compact model, called the Invitation, at its Sunderland factory.
The announcement was made at the Geneva motor show in Switzerland.
The Japanese carmaker said that its £125m investment would create 2,000 jobs. The government is supporting the project with a £9.3m grant.
Nissan said that 400 of the new jobs would be in its Sunderland plant, and it estimates 1,600 jobs will be created in the supply chain.
"When we've looked at the numbers before, it's usually for every one person employed in the facility there is four in the local supply base," Trevor Mann, senior vice-president of manufacturing for Nissan Europe, told BBC News.
Production of the new compact car is scheduled to start from mid-2013.
Nissan plans to build 100,000 of its new Invitation model per year at its plant in Sunderland, where it currently makes about 480,000 of its Qashqai, Juke and Note models per year.
The plant is already the biggest car factory in Britain.
Business Secretary Vince Cable told the BBC that the news was "a really great announcement".
He added: "It is very positive, but you can't see this in isolation, because the other big car companies have also made major commitments to the UK.
"Jaguar Land Rover, Ford, BMW Mini, are all putting in more money and bringing back supply chain."
The additional investment in Nissan's Sunderland facility will increase its workforce to 6,000, which is a record high for the factory.
The employers' organisation, the CBI, also welcomed the announcement.
"The Nissan Sunderland journey is a remarkable story, demonstrating British manufacturing capabilities at their best - excellent training, a committed, skilled workforce and brilliant, determined leadership," said CBI director-general John Cridland.
Please login to add to favorites
Already added to favorites
Added as Favorite