After months of wrangling, France defeated a bid from Japan and signed a deal to site the 10 billion euro ($12.2 billion) experimental reactor in Cadarache, near Marseille.
The project will seek to turn seawater into fuel by mimicking the way the sun produces energy.
Its backers say it would be cleaner than existing nuclear reactors, but critics argue it could be at least 50 years before a commercially viable reactor is built, if at all.
"We are making scientific history," Janez Potocnik, the EU's Science and Research Commissioner, told a news conference in Moscow, where the multinational partners in the International Thermonuclear Experimental Reactor (ITER) project were meeting.
A nuclear fusion power station is the "Holy Grail" for scientists trying to find a viable alternative to the world's depleting stocks of oil and gas.
Crude this week reached a record price of $60.95 a barrel in some trading and a summit of the Group of Eight industrial nations next week is to discuss, widely blamed on burning fossil fuels for energy.
Unlike existing fission reactors, whichby splitting atoms apart, ITER would generate energy by combining them. Power has been harnessed from fusion in laboratories but scientists have so far been unable to build a commercially viable reactor, despite decades of research.
The 500-megawatt ITER reactor will use deuterium, extracted from seawater, as its major fuel and a giant electromagnetic ring to fuse atomic nuclei at extremely high temperatures.
One of the biggest challenges facing scientists is to build a reactor that can sustain temperatures of about 100 million Celsius (180 million Fahrenheit) for long enough to generate power.
"I give it a 50-50 chance of success, but the engineering is very difficult," said Ian Fells of Britain's Royal Academy of Engineering. "If we can really make this work there will be enough electricity to last the world for the next 1,000 to 2,000 years."
Big concessions to Japan
The ITER project began in 1985 but wrangling over the site and financing have caused repeated delays.
At their meeting in Moscow, officials from ITER partners China, the 25-nation EU, Japan, Russia, South Korea and the United States chose France over Japan.
In its long battle to host the project, the EU, backing member France, used some of the tactics of unilateralism it often criticizes in the United States, vowing to go it alone or build ITER with a "coalition of the willing" if the Japanese did not yield.
In the end, the EU made huge financial and industrial concessions to the Japanese.
The EU will fund 40 percent of the 4.6 billion euro construction cost with France paying an additional 10 percent, while each of the other five members of the consortium will pay 10 percent.
In Tokyo's case, this will be offset by contracts for up to 10 percent of the procurement, EU participation in science projects in Japan with up to 8 percent of the cost of ITER construction, and a disproportionate share of Japanese staff on the ITER organization, including the post of director-general.
"We believe that the ITER project should start as soon as possible for the sake of mankind's future," said Nariaki Nakayama, Japan's science minister.
Building the reactor is expected to take about 10 years, but some scientists say it could take three times that long and the sides have yet to reach a final agreement on a number of issues, including financing, before the builders can move in.
Environmental campaign group Greenpeace estimates that if the project yields any results at all, it will not be until the second half of this century.
"At a time when it is universally recognized that we must reduce greenhouse gas emissions by 2050, Greenpeace considers it ridiculous to use resources and billions of euros on this project," it said.
France has been a big producer of nuclear energy since the oil shocks of the 1970s and has 58 nuclear reactors, the most in the world after the United States.