It sounds like it ought to be a sick joke. But in the town made infamous for its annual slaughter of hundreds of dolphins, tourists will now be able to swim and play with the mammals in a zoo near where the cull takes place.

Taiji, featured in the Oscar-winning documentary The Cove, is to build a whale zoo. Yet despite the move, officials say the cull will continue.

Local media reports say the picturesque town on Japan's Pacific coast plans to populate the proposed 69-acre marine mammal park with bottlenose dolphins and pilot and other small whales caught nearby.

The town, in the Higashimuro district of Wakayama, has been the target of international criticism for almost a decade over the hunt, in which up to 2,000 animals are killed for their meat or sold to aquariums and marine parks.

The meat from a single animal can fetch up to 50,000 yen (£390), but aquariums have paid more than 10m yen for certain types.

Pressure to end the cull intensified after the 2009 release of The Cove. In order to make the film, directed by Louie Psihoyos, the crew broke into the fenced-off bay and installed hidden cameras to capture footage of the hunt.

Taiji is one of four Japanese towns that hunts small cetaceans in coastal waters, but has been the focus of criticism because of the way fishermen capture and kill their prey. Hunters confuse the animals by banging metal poles on the side of their boats and then herd them into a cove before attacking them with spears and knives.

Many of the residents who proposed the whale park realise the mammals are more valuable to the town's economy alive than dead, and only a handful of fishermen in Taiji, a town of 3,500, are involved in the slaughter.

During the most recent cull season, which ran from September to March, 928 dolphins were caught, according to the local fisheries authorities.

Outside a small number of coastal communities, few Japanese people eat dolphin meat, which tests have shown contains high levels of mercury.The government, which allows about 20,000 dolphins to be killed each year, acknowledges that the meat is contaminated but says it is not dangerous unless consumed in large quantities.

Construction of the zoo is not expected to begin for three to five years while authorities try to secure funding and settle rights issues with fishermen who cultivate pearls and other marine products in the area. The zoo will feature beaches and mudflats, with its oceanside entrance in Moriura Bay closed off by a 430-metre net. "We want to send out the message that the town is living together with whales," Jiji Press quoted Taiji's mayor, Kazutaka Sangen, as saying.

He said the construction of the zoo would not coincide with an end to the dolphin hunt. "We will continue hunting dolphins and establish Taiji as a town of whales, however much criticism we get from abroad," he told the Asahi Shimbun newspaper.

While The Cove drew international praise for its daring attempt to expose the bloody reality of Taiji's dolphin hunt, fishermen and officials said the film was deliberately misleading and ignored the town's historical and cultural attachment to whaling.

The movie made its Japanese debut at the 2011 Tokyo international film festival before going on general release. Several cinemas in Japan decided not to show it, however, after ultra-nationalists threatened to disrupt screenings.

Psihoyos later sent Japanese-language copies of the movie to every household in Taiji with the help of a local ocean conservation group. The American director said the film was intended as a "love letter to the people of Taiji".