Dubbed by Vilnius the largest defence investment in Lithuania's history, the plant is seen as a new sign of Europe re-arming to counter security threats from Moscow.
Rheinmetall signed a land lease agreement and supply contract with the Lithuanian government for the procurement of 155mm ammunition.
"This agreement provides maximum benefit to Lithuania, both in terms of defence and ammunition procurement," Lithuanian Economy Minister Ausrine Armonaite told reporters in Vilnius.
Rheinmetall, Germany's largest military equipment maker, said it would invest 180 million euros ($190 million) in the plant, which is due to begin operations in mid-2026.
Once completed, it "would be able to produce tens of thousands of 155mm calibre artillery shells per year," Rheinmetall said in a statement.
The factory will be located near Baisogala, a northern Lithuanian town close to a NATO air base.
Lithuania's staunch ally, Germany is its key arms supplier.
Berlin has also committed to permanently stationing 5,000 troops in Lithuania by the end of 2027.
Several hundred German troops are already in Lithuania.
Lithuania, a former Soviet republic, is known as a top donor to Ukraine and a big defence spender, with a current budget of 2.75 percent of GDP.
The Baltic state of 2.8 million people fears it could be next in Russia's crosshairs if Moscow wins its war against Ukraine, which began with an invasion in 2022.
sau/mmp/jhb
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