Sir Michael Bishop, the British Midland chairman, said the expansion plan would double the size of the existing workforce, increase its aircraft fleet from 52 planes to 80 and see the launch of transatlantic services to add to its European network.
Under the agreement Lufthansa has paid pounds 91.4m for a 20 per cent stake in the carrier. This values British Midland at pounds 457m and Sir Michael's controlling 60 per cent stake at pounds 274m.
Lufthansa has acquired its shareholding from another member of the Star Alliance, Scandinavian carrier SAS, whose stake will now fall to 20 per cent.
SAS bought its original 24.9 per cent holding in 1988 for 250m Swedish krona (pounds 18.5m) and increased its shareholding to 40 per cent in 1994.
The enlarged Star Alliance will have 27 per cent of all take-off and landing slots at Heathrow, enabling it to mount a stronger challenge to BA.
But Sir Michael said that the One World alliance, of which BA is the pivotal member, would still control 48 per cent of Heathrow slots or nearly twice as many as Star.
BA, which was initially intensely hostile to the deal, accusing British Midland of allowing a back-door takeover of the British aviation industry, said yesterday that it did not object either to Lufthansa taking a stake or to British Midland joining Star.
However, it called on regulators to examine the deal on the same basis as other airline alliances, including its own stalled tie-up with American Airlines.
"Airlines throughout Europe must abide by the same laws and the same interpretation of laws. They must be regulated on a fair and equal basis," BA said.
Sir Michael said he did not believe there were any regulatory grounds on which its entry into Star Alliance could be blocked, and disclosed that Mario Monti, the European Competition Commissioner, was briefed on the deal on Monday.
Jurgen Weber, the chairman of Lufthansa, said it believed in "fair and equal partnership, not domination," and added: "As far as I know Brussels will be happy with more competition at Heathrow."
Sir Michael said were no plans for any further changes in the shareholder structure of British Midland.
Nor would its entry into the Star Alliance result in any slots being traded with other members. There are nine members including United Airlines.