Lufthansa and FMG, the airport's governing body, are to invest €650 million ($850 million) to build a satellite terminal that would expand annual capacity by 11 million passengers, a statement said.
Terminal 2, to which the structure would be attached, is expected to reach a maximum capacity of 25 million passengers next year, meaning the extension would raise its potential by 44 percent.
The airport is to cover 60 percent of the project's cost, with Lufthansa paying the rest.
Munich is working to close the gap with Frankfurt, Germany's leading airport, but the planned development still requires final approval from the German state of Bavaria and the Munich city council.
Last year, Munich saw 37.2 million passengers, behind Frankfurt at 50.9 million but well ahead of number three Düsseldorf on 17.8 million.