Toyota will use state and federal government grants to upgrade its engine plant, in Melbourne's west.
The Altona plant will be reconfigured to produce 100,000 Hybrid Camry engines and a more fuel-efficient petrol engine from 2012.
The Federal Government has chipped in $63 million towards the $300 million upgrade. Victoria is contributing more than $10 million.
Victorian Premier John Brumby says the deal will not create any new jobs, but will give security to the existing workforce.
"If Toyota had not committed to the hybrid two years ago and Toyota had not committed to a new engine plant, then I think you would have seen a measurable and gradual decline of business facility over time," he said.
Federal Industry Minister Kim Carr says the investment is a positive sign for Australia's motor vehicle industry.
"This is a very important announcement which follows on from the announcements made by General Motors Holden and Futuris today for increasing job opportunities for Australians to ensure that we have high-skilled, high wage jobs in this country in the foreseeable future," he said.
Mr Carr says the investment is important for the industry's long-term future.
"We are looking to ensure that Australia remains part of the leading nations for automotive manufacturing in the world," he said.
