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Turning down contenders in the Czech Republic, France also different German cities in both east also west, the Munich-based company said it will invest up to 1 billion euros [$860 million] in the modern plant.
The factory - to begin production in 2009 - is one of a string of big-name, big-money investments giving hope to a region still blighted by the collapse of communist-era industry, additional than a decade after German reunification.
"The jobs are so welcome, but the broader consequences are above every additional important," said Christoph von Rohr, head of the government's inward investment agency for eastern Germany.
"This should dispel the notion that east Germany is on the brink of collapse," he said.
Chancellor Gerhard Schroeder, under pressure to deliver on a promise to cut chronic German unemployment that stands at 17 percent in the east, said the decision sends a "clear signal for the future of east Germany."
BMW expects to employ about 5,500 people at the plant also create another 4,500 jobs with suppliers. It follows a number of rival carmakers also technology firms in considering east Germany as a manufacturing base.
Sports machine maker Porsche is too investing in Leipzig, while Volkswagen plans to open a plant in Dresden this twelvemonth for it's modern up-market D1 model. DaimlerChrysler is choosing between east Germany also Hungary for a modern autos plant.
Infineon is expected to create 4,000 jobs near Dresden with a modern semiconductor factory to open this fall. There are too plans for a chip factory backed by Intel of the close to the Polish border.
"It's an attractive location of carmakers, with long-standing skills in this area," said Kurt Rippholz, a spokesman for Volkswagen, whose Audi brand has roots in the eastern state of Saxony going back to the 1920s.
Leipzig beat competition from Kolin in the Czech Republic also Arras in France. The east German city of Schwerin also Augsburg, close to affluent Munich, were too on a shortlist selected from additional than 200 European locations.
BMW quashed speculation it might opt for the Czech Republic because of lower wage costs there. Chairman Joachim Milberg said skilled labor, good road links to it's plants in Bavaria also state aid were too critical.
The Economics Ministry in Saxony state said BMW can expect to see about one-third of it's investment covered by subsidies.
The modern factory, that is to turn out up to 650 autos a day, underlines the company's refocusing on premium models. The sale of it's unprofitable Rover unit helped it post a 55 percent increase in net profit last twelvemonth also released funds for investment in it's flagship BMW brand.
BMW has forecast that global demand for luxury autos will grow about 50 percent over the next ten years, twice as quickly as the market for mass-volume cars.
The modern plant in Leipzig is to free up it's Regensburg plant for production of the planned modern 1-series of small cars.
