Late last year Ethiopia announced plans to increase its annual sugar production to 1.3 million tons by 2011 from a current 300 000 tons.
India's Exim Bank will finance the $640m.
"It is the largest ever line of credit that India has provided to any country so far," Gurjit Singh, the country's ambassador to Ethiopia, said while signing an agreement between India and Ethiopia.
New factory
The remaining $660m will be covered by the Ethiopian government.
The money will mainly go towards erecting a new factory at Tendaho in the country's Afar region, and expansion of Finchaa, one of four existing sugar factories in Ethiopia within the next two years.
"With the completion of Tendaho... and the enhanced production of the existing four sugar factories... annual sugar production is expected reach up to 1.3 million tons within the next two years," Trade and Industry Minister Girma Birru said.
Tendaho will have an annual production capacity of 600 000 tons and will be Ethiopia's largest sugar factory. It will be located in the lower Awash Valley, in the Afar region, along the Addis Ababa-Djibouti highway and railway line.
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