"I am delighted to officially announce that we have signed a contract to bring Formula One racing to Baku in 2016," Azad Rahimov, the country's minister for youth and sport, said in a statement issued at the Hungarian Grand Prix.
"The deal to bring Formula One racing to Baku is a very significant new chapter in our ongoing success to attract the world's largest sporting events to our country."
Formula One's commercial supremo Bernie Ecclestone told Reuters in May that an agreement had been signed for a street race in the Azeri capital, on the shores of the Caspian sea, next year.
However, that would take the calendar over an agreed maximum of 20 races, with that number already accounted for after Mexico announced a five-year deal this week for a race from 2015, unless others are dropped.
The current calendar has 19 races and anything over 20 would require the agreement of all 11 teams.
Russia is due to make its debut this year, despite the crisis in Ukraine, with a street race around the 2014 Winter Olympic Park in Sochi. Austria returned last month after an 11-year absence.
A street race in New Jersey remains a possibility, although plans have twice foundered.
Ecclestone said last year that he had no doubt Formula One would be racing in New Jersey in 2015 but more recent reports have suggested 2016 at the earliest, with many sceptical about that date as well.
Baku could ultimately be paired with Sochi, just as Mexico is likely to be back-to-back with the U.S. Grand Prix in Austin, Texas, towards the end of next year.
The European Grand Prix designation is a floating one that was most recently used for a race in Valencia, Spain, in 2012.
It has been attached previously to grands prix held at Germany's Nuerburgring, the British circuits of Brands Hatch and Donington Park, and Jerez in Spain.
Rahimov said the design and layout of the Baku circuit had yet to be finalised but the start/finish, main grandstand and pit were likely to be in the city's Azadliq Square. The track will also feature local landmarks.
"We are very happy that Baku has joined the Formula One family. This will be a street race, which will pass through interesting and picturesque parts of Baku. The event will meet the current Formula One criteria," Ecclestone said in the statement.
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