The US has accused Tehran of seeking to produce nuclear fuel for use in warheads but Tehran insists its atomic scientists are only striving to meet booming domestic demand for electricity.
“The cabinet in its meeting this afternoon agreed to construct an atomic power station in Khuzestan using local technology,” a state television report said.
The report gave no indication of when Iran would start work on this reactor.
Khuzestan is home to the biggest oilfields of the world’s fourth biggest crude producer.
The province is also home to most of Iran’s Arab minority who complain of discrimination from non-Arab Iranians.
Iran’s Arab south has simmered with ethnic unrest since April, when five people died in anti-government protests.
These were sparked by rumours that the government was considering re-locating more non-Arabs to Khuzestan to water down Arab influence there.
Seven people were killed in a bombing in June and six more in a blast in October. Some minor oil facilities were bombed in September.
Arabs make up about three percent of Iran’s population of about 68 million.
Iran has almost completed its first nuclear power station at the Gulf port of Bushehr, an US$800 million investment contract built with Russian help.
Tehran hopes the 1,000 Megawatt project will go online in late 2006.
The Islamic Republic has pledged to build more power stations.
Some officials say Iran is eventually looking at producing 6,000 Megawatts from atomic reactors by 2020, while others say the country simply wants 20 nuclear power stations.
Iran insists it has the right to develop the uranium it mines in its central deserts for use in these power stations.
But many countries are putting pressure on Tehran to enrich its uranium in Russia, thereby guaranteeing that it will only be enriched to the low level needed for power stations and not to the higher weapons-grade.