The Burnaston plant in Derbyshire will become the sole European centre for the next Toyota Auris hatchback family car, the firm said in a statement.
"The introduction of new generation hatchback models will increase Burnaston production volumes, creating up to 1,500 additional jobs in the next two years," said Toyota, adding the first 500 workers would be hired in mid-2012.
The company will invest more than £100 million ($155 million, 116 million euros) in Burnaston, taking its total investment in Britain to more than £2.1 billion since 1989.
Prime Minister David Cameron welcomed the news, which came on the same day that Swiss food giant Nestle announced it was creating 300 jobs at its coffee capsule factory in nearby Tutbury.
"This major announcement from Toyota is fantastic news and a massive vote of confidence for UK manufacturing," said Cameron, who visited both the Toyota and Nestle factories on Thursday.
"This investment and the jobs it will create provide a terrific boost not just to the local economy but to the whole country, and is a tribute to the great skill, hard work and sheer professionalism shown by the Toyota workforce."
He added: "It is vital that we build a more balanced economy, one with manufacturing, innovation and exports at its heart. The automotive sector is leading the way in helping us achieve this."
Meanwhile, Toyota also revealed that it will start production of small C-series sedans in Turkey.
"Toyota Motor Manufacturing Turkey, which currently builds the Verso compact MPV and shares production of the Auris hatchback, will become its European centre for C-segment saloon production," the group added.
"These moves are designed to maximise production efficiency and increase local production of vehicles sold in Europe."
Toyota's plant in the western province of Sakarya will make the vehicles, with new investment of 150 million euros creating more than 400 jobs, the Anatolia news agency reported.
The Burnaston plant, which opened in 1993, was Toyota's first in Europe. It produces the Auris Hybrid, Auris and Avensis cars.