From July 14, Dunedin would become the airline's fifth New Zealand destination, with a daily flight to and from Auckland, Jetstar Group chief executive Bruce Buchanan said.
"It is one of those cities we have been keen to get into from day one. It is a monopoly route and we think that there is a great opportunity for us to ... really shake things up."
The daily A320 flight would break Air New Zealand's monopoly on the route and boost the market by 46% - providing "a massive stimulant and shot in the arm for the local economy".
"There's the [routes] that Jetstar are on where Air New Zealand is being competitive and offering reasonable airfares, and there is every other market where they are gouging and charging high prices."
Mr Buchanan said he expected Air New Zealand would respond to Jetstar's entry into Dunedin and drop fares, but "we will keep them honest".
"We are just continuing to build out the network, and Dunedin is the next cab off the rank."
The route would provide an alternative gateway to the South Island, following February's Christchurch's earthquake.
Expanding domestic services from Dunedin was "in the pipeline".
"We could [also] see some transtasman services into Dunedin in the longer run," Mr Buchanan said.
"The critical thing is getting the economics right." It was important to grow its New Zealand domestic market from Auckland, Christchurch, Wellington and Queenstown ahead of the Rugby World Cup, with the opening of the Forsyth Barr Stadium one of the factors in its expansion.
The new service would allow passengers to access Jetstar's Auckland hub, and its Asia Pacific network, he said.
Mr Buchanan acknowledged the airline had "teething problems" when it first launched in the country two years ago, but did not expect any more problems during its latest expansion phase.
Dunedin International Airport chief executive John McCall said the company had been talking to Jetstar for several years, with those talks "stepping up a notch" two months ago.
"It is always particularly pleasing when you have a new airline coming into your port."
The flight connected Dunedin with the country's most populous city and airport, opening up business and tourism opportunities.
The Dunedin-Auckland route had performed well for Pacific Blue, which withdrew from the New Zealand domestic market last year, with Air New Zealand increasing its capacity earlier this year.
"Having competitive choices simply grows the market, and these guys are promising lower fares, and markets respond to competitive airfares."
Otago Chamber of Commerce chief executive John Christie welcomed the increased competition, which would lead to cheaper fares and the possibility of more routes being added.
"It makes Dunedin more accessible."
An Air New Zealand spokesman said: "We've operated direct services to Dunedin for a decade and have seen other carriers come and go during that time".
"Air New Zealand increased direct services from 13 to 20 per week in February, equating to more than 5300 seats."
