European aerospace group EADS and BAE Systems have given the go-ahead for Airbus to develop a 3bn-4bn-euro ($4bn-5.3bn) jet to rival the fuel-efficient Boeing 7E7.
The new Airbus will be an evolution of the A330
The decision was made at an EADS meeting in Amsterdam on Friday.
The A350 will be a spin-off of Airbus' existing A330 but with longer range and modern materials that make it more competitive against the future Boeing.
There will be two versions of the A350: one with 245 seats and one with 285.
The 245 seater - the A350-800 - will be able to fly for 8,600 miles before refuelling.
The A350-900 will be able to carry more passengers but fly for 7,500 miles.
Airlines want to cut fuel costs and mid-sized low-fuel consumption planes meet this need.
BAE Systems has a 20% stake in Airbus, EADS owning the remaining 80%.
"Airbus has presented a strong business case for the launch of this very significant new aircraft," said Mike Turner, chief executive of BAE Systems.
"The A350 will contribute strongly to the... Airbus family."
The A350 is scheduled to enter service in the first half of 2010.
Boeing estimates that the market for mid-sized jets such as its proposed 7E7 will be worth more than $400bn over 20 years.
But Washington is becoming increasingly irritated by Airbus' plans to apply for European government loans to develop the plane.
Airbus overtook Boeing as the world's largest manufacturer of big commercial jets last year, and the companies accuse each other of obtaining illegal subsidies.
The US Government has sought a ruling from the World Trade Organisation on the issue.