US chip giant Intel has signed a deal in Beijing to build a €1.9 billion semiconductor plant in Dalian, a port city in China's Liaoning province.

Production of chip sets is expected to begin in 2010.

It is a potent sign of China's growing sophistication in the fiercely competitive manufacturing sector, in which Ireland has always been a major player.

The new project will make Intel one of the biggest foreign investors in China and raise its total investment in China to nearly €3 billion.

"China is our fastest-growing major market and we believe it's critical that we invest in markets that will provide for future growth to better serve our customers," Intel chief executive Paul Otellini said.

The deal was signed in the Great Hall of the People, near Tiananmen Square, in the Chinese capital.

Groundbreaking on the greenfield site in Dalian, a port city in the northeast of China, is scheduled for July.

The 300mm-wafer fab will be Intel's first semiconductor plant in Asia. The company has already spent €980 million on test and assembly plants in China.

The project will become Intel's eighth 300mm wafer factory, adding to a network which includes Ireland, the US and Israel. The 12- inch wafer plant will have a monthly capacity of 52,000 wafers and will use 90-nanometre technology to produce chip sets.

The deal was widely covered in China's media and marks a major step forward for Beijing's efforts to steer China away from heavy industry into the more attractive, and lucrative, information technology sector.

Chinese officials are keenly interested in Ireland's success in luring leading firms in the IT sector.

China's remarkable economic boom has been built on cheap production, but the focus is increasingly on trying to find the next stage of development, which means a move away from heavy industry and labour-intensive manufacturing towards more sophisticated forms of production.

Beijing has sent numerous delegations to Ireland to examine the Irish model and several cities, including Dalian where Intel will locate, have built advanced technology parks in the expectation that US and Japanese companies will locate higher grade manufacturing facilities in China.

Innovation is a buzz word in China these days and Dalian is one of the cities that has been most successful in wooing foreign companies, especially Korean and Japanese firms.

"Our goal in China is to support a transition from 'manufactured in China' to 'innovated in China'," said Intel's Mr Otellini.

Intel opted for Dalian over a dozen other sites, including cities in Israel and India, because China was Intel's fastest-growing market and the cost of production was lower, he said.

Hua Jianmin, a member of China's State Council, or cabinet, said after a meeting with Mr Otellini that he hoped Intel would expand its co-operation with Chinese companies.

The Dalian city government estimates the new plant could provide about 1,700 jobs and the operation and the economic spinoffs it creates in training, logistics and other services, will be worth about €12 billion.

Intel will also fund a semiconductor college in the Dalian University of Technology and donate an eight-inch chip-producing assembly line.