The plant will begin producing silicon wafers about the size of dinner plates with transistors as close together as 65 nanometers in late 2005, Intel said at a developer conference in San Jose, Calif.
By using larger wafers, which are broken into chips, and fitting transistors closer together, Intel can produce chips more efficiently and create microprocessors that run cooler and faster.
Intel saves construction money and keeps an existing highly skilled workplace by converting the existing plant instead of a building a new one, Robert J. Baker, senior VP and general manager of Intel's technology manufacturing group, told The Associated Press.
Intel says the project will create hundreds of temporary construction jobs but won't increase the plant's permanent workforce of about 2,000 people.
Microchip makers have cut back on building new plants and buying new chipmaking equipment amid the worst downturn on record in the semiconductor sector. Intel said last month that it plans to spend $3.5 billion to $3.9 billion on new equipment this year, down from $4.7 billion in 2002.
But the chipmaker is banking on mobile computing and wireless networking to help stimulate demand, and many analysts are looking for the chip industry to pull out of its slump this year.