It will take 20 years to build Konza Technology City about 60km (37 miles) from the capital, Nairobi.
 
It is hoped that more than 20,000 IT jobs will be created in Konza by 2015, and more than 200,000 jobs by 2030.
 
Despite Kenya's usually divisive politics, the project has the backing of all political parties.
 
Konza is part of the government's ambitious Vision 2030 initiative to improve much-neglected infrastructure over the next 18 years.
 
Correspondents say the government also wants to take advantage of the growing number of software developers in the East African nation.
 
'Tremendous opportunities'
 
"It is expected to spur massive trade and investment as well as create thousands of employment opportunities for young Kenyans in the ICT [information communications technology] sector," President Mwai Kibaki said at the ceremony to launch the construction, adding it would be a "game-changer" for the country's development.
 
He called on domestic and foreign investors to take advantage of Konza's "tremendous opportunities".
 
The 5,000-acre (2,011-hectare) site was a ranch to the south-east of Nairobi on the way to the port city of Mombasa.
 
When the plan was announced after the last elections property prices in the area soared, reporters say.
 
According to the Konza information website, the city wants to attract business process outsourcing, software development, data centres, disaster recovery centres, call centres and light assembly manufacturing industries.
 
A university campus focused on research and technology as well as hotels, residential areas, schools and hospitals will also be built.
 
The government has appointed the Konza Technopolis Development Authority to oversee the building of the IT hub, which will be built in four phases - starting with the technology centres first.