The European Grand Prix will be held on a new street circuit in the Spanish city of Valencia from 2008.
The seven year deal was announced in Valencia today, and means that Spain will henceforth have two grands prix as Barcelona has a contract to host the Spanish GP until 2011.
Formula 1 is currently extremely popular in Spain due to Fernando Alonso's world championship success, with a huge crowd expected for this weekend's Catalunya race.
Although Valencia has a permanent racetrack on the outskirts of the city - which is regularly used for F1 testing - the European GP will be held on a street track around the harbourside.
Valencia's deal to host this year's America's Cup yacht race has revitalised the city's port area and brought considerable investment and development.
A grand prix is seen as an ideal way to maintain the Valencia's profile after the yacht event this summer, and for F1 to capitalise on the 'Alonso effect' in Spain.
McLaren launched its 2007 car in Valencia in January, with Alonso conducting an F1 demonstration in the city's streets as part of the event.
Asked for his thoughts on the announcement at Thursday's Spanish GP press conference, Alonso said: "Now we have two grands prix in Spain and for me it will be okay and I twill be nice to see how it develops in Spain the last four or five years as before we didn't even have television coverage four years ago and now we are going to have two Grands Prix in the country, so it is very special.
"So I am happy for the motor sport in Spain but for us it is not a big change to take the plane to Valencia or take the plane to Italy..."
The Valencia circuit will be the first new street venue to join the F1 calendar since the short-lived Phoenix track that hosted the US GP from 1989 to 1991.
The McLaren F1 during it's launch in Valencia earlier this year
Bernie Ecclestone announces the new street race in Valencia
Sorce: itv-f1
Valencia street track joins F1 calendar
