The factory--AMD's second in the city--will be built with financial help from Germany's federal government and the state of Saxony, and should be up and running in 2006.
Dresden is already home to AMD's Fab 30 factory, which makes its Athlon chips for use in personal computers.
Company president and chief executive Hector Ruiz said Thursday the plant would help the company meet an anticipated increase in demand for its products, including its new 64-bit chips.
"Positive customer response and increasing momentum for our AMD64 processors make it clear that the time is right to expand our manufacturing capacity in order to meet future demand," Ruiz said in a statement.
The project is slated to get some $500 million in grants and allowances from the federal and local government, and $320 million in equity funding from Saxony and investors led by M+W Zander, a Stuttgart-based firm that specializes in planning and managing high-tech factories.
A group of banks is loaning $700 million, with 80 percent of that covered by government guarantees.
"By building in Dresden, we are able to leverage the outstanding capabilities of our existing AMD Fab 30 and gain access to the most substantial government-backed financial incentives package available to us," AMD chief financial officer Bob River said.
Germany's education and research minister, Edelgard Bulmahn, said the plant was part of an effort "to trigger a new dynamic with technological innovations that create jobs and secure Germany's future."
AMD, based in Sunnyvale, Calif., is the world's second largest maker of PC microprocessors behind Intel Corp. and had some $2.7 billion in sales last year.