The Commission ruled that the payment will not break rules designed to stop a company gaining an unfair advantage over its rivals.
"This is an important investment project in a high-tech sector which will contribute to regional development and job creation in a disadvantaged region of Germany," said Neelie Kroes, European Commissioner for Competition.
The €262m payment by the German government will go towards the estimated €2.2bn total cost of upgrading and extending the plant, which already employs several thousand people in the region.
AMD's facility currently turns silicon wafers into computer components and will add the ability to create 300mm wafers and a new clean room.
The Commission turned down a request from Intel in 2005 to receive €170m payment from the Irish government, as the company had previously received €220m aid for its Dublin plant.
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