Volkswagen plans to expand its Chattanooga, Tenn., factory and start production of a seven-passenger sport-utility vehicle at the plant.
The project will create about 2,000 jobs in the United States and an investment of about $900 million, including $600 million at the factory.
The automaker already has 2,500 employees building the Passat for the U.S. market at the plant.
VW is trying to reverse a sales slide in the U.S. by adding new products that better match consumer demand. The German automaker has set a target of selling 800,000 vehicles in the U.S. by 2018. But last year, it sold only 408,000.
Through the first six months of this year, sales have dropped more than 13% to 179,000.
"With the midsize SUV, the expansion of the Chattanooga plant and the new development center, the focus is on the wishes of the U.S. customer," said Martin Winterkorn, Volkswagen's chairman. "The Volkswagen brand is going on the attack again in America."
VW has invested heavily in China, Brazil and other nations in recent years to the detriment of its U.S. operations, Winterkorn said.
Although VW is a small brand in the U.S., the company is among the largest automakers globally.
In pinning its hopes on a mid-size SUV, VW is attacking one of the hottest segments of the market. But the factory won't start turning out the vehicle until nearly the end of 2016, making VW's 2018 target difficult to reach, analysts said.
"This investment likely will address one of the glaring holes -- an entry in the fastest-growing vehicle segment of small crossovers," said Michelle Krebs, analyst for AutoTrader.com. "To even get close to its goal, VW needs to beef up its product portfolio."
VW also plans to locate a research and development center at the factory complex, which will focus on planning cars for U.S. consumers. It will create about 200 engineering jobs in Chattanooga.