Six individual countries and the European Union agreed to spend about €10bn (£6.75bn) over the next 20 years to construct and operate the International Thermonuclear Experimental Reactor (Iter) at Cadarache in the south of France.
The agreement between the US, China, the EU, India, Japan, South Korea and Russia to build Iter - which also means "the way" in Latin - was signed at a ceremony at the Elysée Palace in Paris.
"The growing shortage of resources and the battle against global warming demand a revolution in our ways of production and consumption," the French President, Jacques Chirac, said. "We have the duty to start research that will prepare energy solutions for our descendants".
The Iter reactor will take about eight years to build and is the first fusion experiment designed to produce more energy than it consumes. It is hoped that it will spawn prototype commercial reactors that could begin to come on stream within the next 30 or 40 years.
Nuclear fusion has been a dream of scientists for many decades because it promises to produce virtually no harmful waste. Fusion needs only small quantities of seawater and lithium - a mineral in plentiful supply - as its raw materials and it produces no carbon dioxide or other greenhouse gases.
Fusion produces energy when atoms of hydrogen are collided together under extreme pressures and temperatures - the reactor core is several times hotter than the centre of the Sun.
Unlike existing nuclear fission reactors, which produce dangerous high-level waste from spent fuel, nuclear fusion is expected to produce only small quantities of moderately radioactive material from contaminated reactor shielding, which would dissipate to safe levels within 100 years.
However, even the most optimistic assessments suggest that nuclear fusion may not become a routine source of energy for at least another 50 years, such are the immense difficulties of building large-scale fusion reactors that work.
The idea for Iter came out of a superpower summit in 1985 but negotiations became bogged down over the choice of where to build the experimental reactor, with Japan and France vying for the privilege.
Last year it was decided that Cadarache in Provence would be the site of the reactor, but it was agreed a Japanese civil servant, Kaname Ikeda, would be its first director general and Japan would supply the main components.
Martin O'Brien, the fusion programme manager at the United Kingdom Atomic Energy Agency's Culham Laboratory, said Iter would be eight times the volume of the Joint European Torus (Jet) in Oxfordshire, the largest fusion machine in the world.
"The way the scaling-up works means that as the machine gets bigger, it will result in getting more energy out of it than is put in," Mr O'Brien said.
The temperature within the reactor's core will exceed 100 million Celsius - about 10 times hotter than the Sun -causing atoms of hydrogen isotopes to fuse together to form helium, an inert gas, and releasing more energy in the process.
Experiments at Jet have achieved fusion for a few seconds at a time but as yet it has used up more energy in heating the plasma gas within the reactor than has been produced.
Miles Seaman, of the Institution of Chemical Engineers, said integrating fusion with a way of storing clean energy in the form of hydrogen could provide the breakthrough to almost unlimited sustainable energy.
"There are undoubtedly some major technological challenges to providing fusion power reliably and continuously. But it can and has been done, albeit in very short bursts," Dr Seaman said.
Professor Jim Skea, the research director at the UK Energy Research Centre, said: "Nuclear fusion could offer one of the biggest prizes in energy: a secure, low-carbon source of electricity without resource constraints. But it will also require a massive investment and there is some risk that it will not pay off."
Dr Paul Howarth, the director of research at the Dalton Nuclear Institute in the University of Manchester, said: "Great progress has been made on fusion technology over the past few decades.
"However, it is now time to move the technology forward, scale up the size of the experiment and investigate fusion energy conditions more likely to found in a commercial reactor."
However, Roger Higman, the policy co-ordinator of the environmental group Friends of the Earth, warned that efforts to limit emissions of greenhouse gases over the next 50 years should not take a back seat in the rush to fusion. "Isn't the money that's being spent on fusion better spent on proven technologies rather than chasing a dream that even its proponents say will take 100 years before it's going to provide any of our energy answers?" Mr Higman added.
How fusion works
* Nuclear fusion is the energy source at the heart of the Sun and is produced when two isotopes of hydrogen - deuterium and tritium - collideunder high temperatures and pressures.
* Helium, an inert gas, is the only waste product and fusion does not create any other emissions, such as the greenhouse gas carbon dioxide.
* Deuterium is easily extracted from seawater and tritium can be produced in the reactor itself with the help of lithium, a light metal that is readily available from the ground. The intensely hot plasma gas inside the fusion reactor is held together by a strong magnetic field.
* Only the metal parts of the reactor close to the hot plasma gas in the centre will become slightly radioactive, but this waste material will be reusable within 100 years.
* Fusion does not involve a chain reaction so it is safer than nuclear fission reactors. Only about half a gram of fuel is needed in the Iter fusion reactor to produce a few seconds of "burn" - making the process even safer.
* The heat generated from a fusion machine will be used to heat water to drive steam turbines for generating electricity. If it can be combined with a way of producing hydrogen gas from water, the sustainable, clean energy produced could be stored for other uses.
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