The announcement was made at the Geneva motor show in Switzerland.
The Japanese carmaker said that its £125m investment would create 2,000 jobs. The government is supporting the project with a £9.3m grant.
Nissan said that 400 of the new jobs would be in its Sunderland plant, and it estimates 1,600 jobs will be created in the supply chain.
"When we've looked at the numbers before, it's usually for every one person employed in the facility there is four in the local supply base," Trevor Mann, senior vice-president of manufacturing for Nissan Europe, told BBC News.
Production of the new compact car is scheduled to start from mid-2013.
Nissan plans to build 100,000 of its new Invitation model per year at its plant in Sunderland, where it currently makes about 480,000 of its Qashqai, Juke and Note models per year.
The plant is already the biggest car factory in Britain.
The company said that the Invitation was designed to compete with cars such as the Ford Fiesta and Volkswagen Polo.
It stressed that the car unveiled in Geneva was a concept vehicle, but that the key characteristics and styling were already in place.
"The new car's key USP [unique selling point] will be its fuel economy," said Kevin Fitzpatrick, Nissan's vice-president for manufacturing in the UK.
Source: SMMT 2011
"It will be fitted with a new generation of engines, which will be built at the plant as well."
The name of the car will also probably have changed before it goes into production.
Business Secretary Vince Cable told the BBC that the news was "a really great announcement".
He added: "It is very positive, but you can't see this in isolation, because the other big car companies have also made major commitments to the UK.
"Jaguar Land Rover, Ford, BMW Mini, are all putting in more money and bringing back supply chain."
The additional investment in Nissan's Sunderland facility will increase its workforce to 6,000, which is a record high for the factory.
The employers' organisation, the CBI, also welcomed the announcement.
"The Nissan Sunderland journey is a remarkable story, demonstrating British manufacturing capabilities at their best - excellent training, a committed, skilled workforce and brilliant, determined leadership," said CBI director-general John Cridland.
Labour leader Ed Miliband said the investment in Sunderland was a result of work done by the last government.
"Government, unions and management worked together, and Peter Mandelson recognised the need for a change in attitude," he told the EEF National Manufacturing Conference.
"We see the response today; the new Nissan investment is a culmination of that approach."

The Perpignan flanker, 32, last featured for the Scots in their Rugby World Cup win over United States in Leeds in September.
Former Edinburgh and Gloucester player Strokosch has been involved with the Scotland squad since 2006.
"I've been lucky enough to fulfil my childhood dream of representing Scotland," he said.
"Wearing the thistle has been the greatest honour and responsibility of my life outside of raising my children."
After breaking through in club rugby at Boroughmuir, Strokosch turned professional with Edinburgh in 2004 and moved on to Gloucester three years later. He has been playing in France since 2012.
His Test career started with a substitute's appearance an autumn series defeat by Australia.
Strokosch featured in eight consecutive Six Nations campaigns up until this year's tournament and his two international tries came against Canada and Italy.
"I treasure every memory from my time with the squad," he added.
"I believe that the group we have now are among the most talented that I've seen have the potential to achieve great things for Scottish rugby.
"I would have never achieved anything without the support over the years, particularly from Bob Easson, Carl Hogg, Dean Ryan, Shaun Longstaff, my parents and my wife Kirsty."
And Scotland head coach Vern Cotter, said: "On behalf of the Scotland squad and management I'd like to thank Alasdair for his commitment to the Scotland jersey over the past nine years.
"For almost a decade he has quietly gone about his business with exceptional professionalism, with a lot of the hard work put in - often in the less glamorous and combative areas of the park - going unseen.
"We wish him all the very best in the remaining days with Perpignan where I know he's committed to doing everything he can to ensure their return to the Top 14 before finally hanging up his boots."
Nissan is to build a new compact model, called the Invitation, at its Sunderland factory.
[NEXT_CONCEPT]
Back-row forward Alasdair Strokosch has retired from international rugby after 47 Test appearances for Scotland.