Leonard Blavatnik, an American industrialist, has committed £75 million to set up the school and is already considering making additional donations.
The university itself has made £26 million available to help establish the new Blavatnik School of Government, which will support 40 academic posts at Oxford.
The school’s first students will enrol in 2012, with 120 eventually studying at the centre. Teaching will be undertaken not only by in-house academics but also by world leaders in business, education and government.
The university said the school will “train outstanding graduates from across the world in the skills and responsibilities of government”.
The Blavatnik School will offer a new master’s degree in government, which will cover the humanities, social sciences, law, technology, health, finance, energy and security policy. A search for the institution’s first dean is already under way.
Andrew Hamilton, vice-chancellor of Oxford, said the new school marked a “huge milestone” for the university.
“It will give tomorrow’s leaders the best of Oxford’s traditional strengths alongside new and practical ways of understanding and addressing the challenges of good governance.”
He said it would also go some way to “correct the imbalance” caused by the majority of international schools of government being located within the US.
World leaders have offered their support for the venture. David Cameron, the British prime minister, said Mr Blavatnik’s major donation marked “a very generous act of philanthropy” to the higher education sector.
Bill Clinton, the former US president, said: “It was at Oxford that the link between smoking and cancer was discovered. Oxford scientists pioneered techniques which enabled us to understand the role greenhouse gases play in climate change. I am confident that Oxford’s Blavatnik School will bring such groundbreaking research closer to the heart of public policy.”