Prince Walid bin Talal, who is reputed to be the fourth richest man in the world, has made one of the biggest donations in France's cultural history in order to help realise the project.
Prince Walid believes that the addition of a specific wing to showcase Islamic art at the Louvre, one of the world's busiest museums with more than seven million visitors a year, will help promote understanding of Islam as a religion of humanity and tolerance.
The Louvre has more than 10,000 artworks from the Islamic world, a collection comparable to that of the British Museum in London, but has had to keep 3,000 pieces in storage because of a lack of space.
The French Culture Minister, Renaud Donnedieu de Vabres, said: "Islam has given birth to some of the richest and most refined expressions in the history of art. They will now be known and understood by millions of visitors to the Louvre, the French and others coming from the four corners of the earth."
President Jacques Chirac is understood to be particularly attached to the project that will give the Louvre the space it needs to exhibit its collection. The additional building, to be built as an extension to the Louvre's southern wing, will house those artworks kept in storage and is expected to open by 2009. The Italian architect Mario Bellini and the French architect Rudi Ricciotti have been retained to design the new wing, which is the museum's eighth.
The estimated cost is €56m, of which the French government will contribute €26m. Total, the oil company, has also contributed €4m but this figure is dwarfed by Prince Walid's donation which makes up almost a third of the total cost of the project. M. Donnedieu de Vabres said that his "gesture is a testament to the generosity of the Islamic world. It also expresses the particular links of friendship that unites France and Saudi Arabia."
Prince Walid frequently holidays on the Côte d'Azur, and he also has significant business interests in the country - he is the owner of the Georges V hotel in Paris and is the second-biggest shareholder in Disneyland Paris.
This is not the Prince's first significant act of philanthropy. He offered $10m (£5.7m) in relief funds following the 9/11 attacks to Rudoph Giuliani, then the mayor of New York. However, the gift was promptly returned after the Saudi Prince blamed the attacks on American foreign policy towards the Palestinians.
* The first Muslim hamburger restaurant has opened on the outskirts of Paris, called Beurger King Muslim, or BKM. The name of the restaurant, which serves Halal food, is a play on the word "beur", the term for second-generation North Africans in France.