The investment comes asand highlights the company's desire to prove that its once-crippling supply problems are a thing of the past.
It also comes on the heels of the announcement this month thatfor powering business networks, fuelling expectations the world's top PC maker will offer more AMD products in the future.
"As global demand continues to rise for AMD products, we are scaling our manufacturing capacity intelligently to meet our customers' growing needs," AMD Chief Executive Hector Ruiz said in a statement.
The expansion was welcomed by government officials in Germany who are keen to attract investment to Dresden and other areas of the ex-communist east of the country, which have struggled economically since reunification in 1990.
The money, to be spent over three years, will be used in part to overhaul AMD's first chip factory in Dresden, known as Fab 30, refitting it with equipment to handle larger silicon wafers that will yield more than twice as many processors as existing machinery. That factory will be renamed Fab 38.
AMD will also expand capacity at its new, second Dresden facility, Fab 36, which began producing test chips last month and is gearing up for volume production soon.
In addition, AMD will build a new "clean room" next year where final preparation of wafers for both factories will take place. Building a separate clean room facility will free up more production space in the fabs, AMD said.
AMD's expansion will create up to 420 jobs in the next three years in Dresden, in the state of Saxony, the company said. Home to some 500,000 people, Dresden is one of the few cities in Germany's depressed east that has had some economic success.
Chipmakers are gradually adopting the latest manufacturing techniques that cut chips from wafers 300 millimeters across, about the size of a 12 inch dinner plate. That yields double the amount of chips as the 200-millimeter wafers previously used.
AMD said the expansions would let its Dresden facilities process a combined 45,000 300-millimeter wafers per month by the end of 2008.
The Sunnyvale, Calif.-based company also has a deal with Singaporean contract chipmaker Chartered Semiconductor Manufacturing to make its microprocessors, giving it a greater ability to respond to sudden spikes in demand or problems at its own facilities.
AMD did not say how it planned to finance the expansions, but it had more than $2.6 billion in cash and short-term investments at the end of its first quarter.
In January, AMD sold $500 million worth of stock to redeem debt and raise money that might be used for capital expenditures.
AMD stock closed at $31.63 on Friday, up 2.1 percent. The stock has nearly doubled in the past year, while Intel has fallen by nearly a third.