The South Korean government confirmed yesterday that it is to create a new capital in what will be one of Asia's biggest ever construction projects.

Under the £26bn scheme, a site in the sleepy region of Gongju-Yongi 100 miles south of Seoul will replace it as the seat of parliament and government by 2020. Despite sharp divisions among the public and the mixed results of similarly ambitious projects by other states, president Roh Moo-hyun insists relocation is necessary to ease chronic overcrowding in Seoul, redistribute the state's wealth, and lessen the danger of a bombardment by North Korea.

Gongju-Yongi is a hilly, rural area in Korea's midlands. Its selection was finalised yesterday - although an appeal has been made to the constitutional court - and caused joy among local farmers expecting a property boom.

Under the plan, announced by the prime minister, Lee Hae-chan, the government will start buying 7,100 hectares (17,540 acres) next year. After construction starts in 2007, the administration hopes to begin moving 230,000 employees into 85 ministries and institutions within five years. With the addition of the constitutional court, a national assembly and the presidential palace, it is expected that this region of 140,000 people will become home to half a million. To fund the move, the government will sell off most of the state's property in Seoul, including the presidential Blue House.

The idea is to create a centre of government similar to Washington DC, while leaving Seoul as a business, financial and cultural capital equivalent to New York. Previous development plans for what is Asia's third biggest economy have concentrated so much money and power in Seoul that the city and its environs are home to almost half of South Korea's 48 million population. By comparison, one in nine Britons lives in London.

President Roh made relocation a pillar of his election campaign, and says it is vital to improve conditions in Seoul by reducing its population by a tenth. A move 100 miles south also takes the government out of the range of much of North Korea's weaponry.

Opponents in the Grand National party argue that the scheme is vote-buying and will cost two or three times times the estimate. Many newspapers have called for further investigation, and civic groups have challenged the plan's validity; the constitutional court must rule within six months if it is to go ahead.

Surveys indicate that the public is evenly split. Most feel the question should be put to a referendum, something the president has refused to accept. The fiercest criticism has been in Seoul, where the mayor, Lee Myung-bak, has warned that relocation would undermine the competitiveness of South Korea as a business hub.

In a battle of wills, the city authorities pulled down subway advertisements by the central government which claimed that Seoul had the worst standard of living among the world's 20 biggest cities. Another discarded poster featured a cartoon of a cramped Seoul businessman watching enviously as a Chinese rival pedals across the expanse of Beijing's Tiananmen Square on his bicycle. The caption read: "Ten reasons why foreign companies choose Beijing rather than Seoul."

It is far from certain, however, that foreign businesses or countries favour relocation. Newspapers report several negative comments by diplomats concerned at the cost of moving. The United States embassy, now in the process of moving within Seoul, said it had no plan to shift again in the foreseeable future.

Such hesitation is inevitable, given the history of Korea's itinerant capital. Yongi country was a centre of government once before - during the Paekyae dynasty 1,500 years ago. Its second opportunity may not last long. If the peninsula re-unifies, there are likely to be calls for the capital to be moved north again, possibly even back to Pyongyang - another ancient seat of government.

City swaps

· In 1956 Brazil's capital moved from lively, crowded Rio to remote Brasilia. But spectacular buildings alone failed to attract the crowds

· Australia's government decided to build Canberra in 1908. A functional, elegant city was created, though many residents escape to Sydney for nights out

· In a symbolic gesture, the German government moved from Bonn to Berlin in 1991. But resources are still split between the two cities

· Though Tokyo earthquake fears prompted Japan's government to look for a new home, no move is likely soon