* Investment includes 740 million shekel government grant

* Production of 22-nanometer chips to begin in December

* Intel Israel exports fell to $2.7 bln in 2010

(Adds detail, quotes, background)

By Tova Cohen

TEL AVIV, Jan 18 (Reuters) - U.S. chipmaker Intel INTC.O will invest $2.7 billion over the next two years upgrading its plant in southern Israel to produce its next generation of chips.

The amount includes a 740 million shekel ($210 million) grant recently approved by the Israeli government.

“We are already in preparation for hiring,” Maxine Fassberg, general manager of Intel Israel, told a news conference on Tuesday. “We are scheduled to start production in December.”

Intel, the world’s No.1 chipmaker, opened its $3.5 billion Fab 28 chip plant in the Israeli town of Kiryat Gat in 2008 and makes processors with 45-nanometer circuitry.

Fassberg said the Kiryat Gat plant will be Intel’s second worldwide to produce the smaller, next-generation 22-nanometer chips. The first will be in the United States.

Intel Israel, which employs 7,057 people, will hire 1,000 people over the coming year to support the expansion.

“There are no plans to build a new plant (in Israel),” Fassberg said.

Intel Israel’s exports in 2010 fell to $2.7 billion from a record $3.4 billion in 2009 even though sales volume rose. This is due to Intel accounting rules regarding revenue recognition for 2009, Aviad Avni, Intel Israel’s finance manager, said.

Intel Israel exports all its production to its parent company in the United States. Intel is the largest private sector exporter in Israel.

Earlier this month Intel unveiled its next-generation microchip, code-named Sandy Bridge, which it said will yield about a third of its corporate revenue in 2011.

The 32-nanometer chip was developed at Intel Israel’s development centre in Haifa together with teams in the United States. In 2011 the Haifa centre will work on advancing the next-generation processor code-named Ivy Bridge, which will be produced with 22-nanometer technology.

Intel has two plants and four development centres in Israel. (Reporting by Tova Cohen; Editing by Jon Loades-Carter) ($1 = 3.53 shekels)