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Minister for Technology Frank Cousins made the announcement in Parliament today.
Dounreay has been awarded the £30m Prototype Fast Reactor (PFR) in the face of competition from the Winfrith nuclear power station in Dorset.
Dounreay's remote location in Caithness, Scotland's most northerly county, was an important factor when construction of the nuclear power station began in 1955.
Its remoteness is believed to be one of the reasons why the PFR will be built there.
But Mr Cousins said the government had also taken into consideration the fact that Dounreay already had many of the required skilled staff and the necessary facilities.
At a press conference, Mr Cousins said there had been a change in attitude towards nuclear power and many local authorities had wanted the PFR built in their area.
Mr Cousins said the new reactors were "the future".
"They will be able to produce new nuclear fuel in the course of their operation and offer a prospect of even greater economy, as well as conservation in the use of uranium," Mr Cousins explained.
Scientists say the technology used by the PFR is the most economical way to produce electrical power.
Current nuclear reactors can extract only 2% of the energy available in nuclear fuel compared with up to 10% for the new reactors.
The United Kingdom Atomic Energy Authority (UKAEA) will build and operate the prototype reactor.
UKAEA chairman Sir William Penney said it was hoped to have commercial power stations in operation by 1978.
But they would have a "real tough time" meeting that target, Sir William added, and it not come to fruition until a couple of years later.
Dounreay was the world's first electricity-producing "fast" reactor - the reactor itself being enclosed in a distinctive dome.
The new reactor will benefit the local economy in Caithness with 700 construction jobs to be filled.
Fast reactors were popular when uranium stocks were thought to be dwindling but construction of them slowed when new uranium reserves were discovered.
The Prototype Fast Reactor at Dounreay was the only one ever built in the UK.
In 1994 the PFR was the last of Dounreay's three reactors to cease operation but the UK remained a member of the European Fast Reactor research programme.
During its lifetime as an electricity-producing station Dounreay supplied 600 million units of power to the national grid.
Dounreay continued to process nuclear waste but in 1998 it was announced that the entire site would be closed.
The announcement followed a series of problems at the plant culminating in the discovery that enough uranium to build 12 nuclear weapons had gone missing.
Dounreay is now in the process of being decommissioned.
It is expected to be 2060 before the site is cleaned of all nuclear material and can be redeveloped.
However, the famous Dounreay dome will remain - Historic Scotland has agreed to class it as listed building.
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