The 26,500 square km (10,230 square mile) zone, known as NEOM, to be powered entirely by renewable energy, will focus on industries including energy and water, biotechnology, food, advanced manufacturing and entertainment, Saudi Crown Prince Mohammed bin Salman said.
The announcement was the highlight at the opening of a three-day international business conference drawing over 3,500 people from 88 countries.
Prince Mohammed, in a rare public address, hailed it as an example of the innovative high tech future he has promised his highly conservative country.
Speaking on a panel, he said young Saudis and the promotion of moderate Islam were the key to his modernising "dream" for his country, the world's largest oil exporter. In a brief political comment, he said the country would eradicate extremism soon.
The stakes in the country's rapid modernisation were high.
"This is a double-edged sword. If they (young Saudis) work and go the right way, with all their force they will create another country, something completely different ... and if they go the wrong direction it will be the destruction of this country," he said.
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