It will be built on one of the two sites currently occupied by GCHQ in Cheltenham, Gloucestershire.

The new building will take over the old GCHQ site

GCHQ sprawls across two sites in a jumble of buildings, some of which date back to World War II.

The new, doughnut-shaped headquarters is designed to be more efficient, and will house the latest technology. It is expected to take three years to build.

GCHQ 'vital to defence'

The Foreign Secretary, Robin Cook, welcomed the announcement.

"GCHQ's work is vital in supporting our foreign and defence policies and this deal will enable GCHQ to meet the challenges the future will bring," he said.

Computer images show a high-tech building

Unions at GCHQ are delighted. The decision to site the new building on the Benhall site was in response to a survey of workers, who made it clear they wanted GCHQ to stay in Cheltenham.

GCHQ was the focus for fierce demonstrations in support of trades unions when the former Prime Minister, Margaret Thatcher, banned union membership there in 1984.

The Labour Government restored union rights when it was elected in 1997.

Allegations of malpractice

The spy headquarters has also been at the centre of allegations of malpractice made by former MI5 worker David Shayler.

Whistleblower David Shayler unveiled GCHQ secrecy

Mr Shayler is in exile in France after Britain failed in its attempt to extradite him for breach of the Official Secrets Act.