"Everyone knows German engineering is outstanding for sure. You know that is part of the reason why we are locating Gigafactory Europe in Germany," Musk said at the ceremony in Berlin.
The plan is a big boost for Germany as a centre for manufacturing after BMW and Mercedes in recent years chose to build new factories in Hungary, and after its auto industry was hit hard by Volkswagen's admission in 2015 that it cheated US diesel emissions tests.
Germany's powerful manufacturing industry has been slowing, with data on Thursday set to show whether Europe's biggest economy has slipped into recession for the first time since 2013.
Tesla is struggling to ramp up production and has yet to prove it can be consistently profitable as rivals including Audi-owner Volkswagen retool plants to mass produce electric cars.
Musk said the factory would be near Berlin's new Brandenburg international airport, diversifying the Silicon Valley firm's production beyond the United States at a time when global trade tariffs make exports more difficult. Besides Europe, Tesla is opening a factory in Shanghai.
Tesla's proposed factory will be within commuting distance of Poland, where labour costs are cheaper, a rival manufacturer - who also looked at the site - told Reuters.
"Tesla's decision to build an ultra-modern factory for electric cars in Germany is further proof of the appeal of Germany as an automotive hub," Economy Minister Peter Altmaier said on Wednesday.
"We think we now have the chance, in the coming years, to become an important international centre in this future-oriented sector," he said.
The German government has earmarked financial support for making electric car battery cells locally as a way to secure manufacturing jobs as tougher emissions rules threaten demand for older technologies, like diesel engines. Dietmar Woidke, the premier of the Brandenburg state that surrounds Berlin, said any official support given to Tesla would be in accordance with European Union rules.
Altmaier said there had been no discussion so far about any subsidies for Tesla's plans, adding the company would be treated like all other carmakers.
Germany's biggest labour union, the influential IG Metall, welcomed Tesla's plan. "This strengthens Berlin as an industrial location and creates jobs. We hope this sets an example," said Birgit Dietze, IG Metall's regional head.