Crown Prince Mohammed bin Salman on Tuesday announced the $500 billion project, dubbed NEOM, which he billed as a hub for technological innovation.
A map published on the project's website shows that the new zone will include the Red Sea islands of Tiran and Sanafir, which Egypt controversially handed over to Riyadh.
Egyptian President Abdel Fattah al-Sisi in June ratified an agreement to cede sovereignty over the two islands to Riyadh, brushing off widespread public criticism of the deal.
Rare street protests broke out over the agreement last year among Egyptians angered over the concession, leading to dozens of arrests.
The issue of the two uninhabited islands touched a patriotic nerve, with activists accusing Sisi of "selling off" a part of the country.
Sisi pushed for the unpopular transfer to pass following an agreement with Saudi King Salman, who reportedly promised billions of dollars in aid and investment in return.
In June last year, the country's highest administrative court ruled Egypt's sovereignty over the islands must stand, prompting Saudi Arabia to temporarily halt fuel shipments to Cairo.
The government has argued that Tiran and Sanafir have always been Saudi, but were handed over to Egypt for protection at a time of heightened Arab-Israeli tension in the early 1950s.
On Tuesday, Bin Salman said the ambitious city, funded by the kingdom's sovereign wealth fund, will run entirely on alternative sources of energy and feature drones, driverless cars and robots working in unison.
London-based economic research consultancy Capital Economics has warned that the plans may never actualise, citing the kingdom's poor record implementing mega-projects such as such as the King Abdullah Economic City.