The ministry said the chipmaker plans a $4.8 billion expansion and technology upgrade to produce wafers with 15-nanometre technology at its Fab 28 chip plant in Israel's southern town of Kiryat Gat.
It said Intel has asked Israel's government for an unspecified grant, and Israeli media put the amount at $500 million to $960 million since Intel typically asks for 12-20 pct of its planned investment.
Intel, the ministry said, will hire 1,300 new employees at its new plant that will raise its workforce to 4,400.
An Intel spokesman in Israel confirmed the company put in a grant request but he said this did not mean Intel would go ahead with the upgrade and expansion.
Industry and Trade Minister Shalom Simhon said in a statement the ministry would review Intel's request. He added that the grant application was a vote of confidence by Intel in Israel's operations and that he hoped it would mean the expansion of its activities and investments.
The world's No.1 chipmaker opened its $3.5 billion Fab 28 chip plant in 2008 and makes processors with 45-nanometer circuitry.
The Kiryat Gat plant is already being upgraded to become Intel's second worldwide to produce the smaller, next-generation 22-nanometer chips at a cost of $2.7 billion. The first will be in the United States.
Israel in January approved a more than $200 million grant for Intel to upgrade to 22 nanometers.
(Reporting by Steven Scheer; Editing by Hans Peters)