The project, which aims to invigorate economic life in a distant part of the vast desert country of 24 million people, follows the announcement of two similar projects elsewhere.
The King Abdullah Economic City near the city of Jeddah also hopes to attract $26.7 billion of investment -- the largest such project the kingdom has ever seen -- and is now listed on the Saudi stock exchange after an initial public offering that attracted 10 million subscribers.
The $8 billion Prince Abdul Aziz bin Musaed Economic City in the town of Hail in north Saudi Arabia is being led by a group of Saudi and Gulf investors but is still in its early stages.
During a visit to Jazan, on the Red Sea coast south of Jeddah and bordering Yemen, on Saturday, King Abdullah said the Jazan project would create 500,000 jobs, newspapers and state news agency SPA reported.
He said the city would form a joint stock company in which low-income citizens of Jazan would have 375 million riyals worth of holdings. There were no details on the company's capital.
Asharq al-Awsat newspaper said the city would sit on a strip of land 12 km long and 8 km wide north of Jazan, including a port, an industrial zone, power and desalination plants, a residential area and corniche. It said the industrial zone will include a $4 billion aluminium smelter set up by Chinese and other international investors. It gave no more details.
The developers include Malaysia's MMC Corporation Berhad, the Saudi Bin Ladin Group and others.
"We have also instructed the oil and minerals ministry to study the possibility of setting up an oil refinery in Jazan, SPA quoted the king as saying.
The king said in a speech that the government was determined to end the region's lack of development in a country enjoying budget surpluses because of high world oil prices.
The government hopes the economic cities -- which are set to total five -- will help diversify the economy away from oil, which has fuelled rapid development since the 1970s.