The move follows a deal by PSA last month on a 400-million-euro deal with its old partner Khodro to build 200,000 Peugeot vehicles a year in Iran by 2018.
PSA said it and SAIPA, Citroen's historical partner in Iran before international sanctions, planned to sign a final agreement later this year.
The joint venture, in which PSA and SAIPA will each have a 50 percent stake, aims to have the first cars rolling off an assembly line in 2018 from a plant in Kashan, some 200 kilometres (120 miles) south of the capital Tehran.
PSA said three Citroen models specifically designed for the Iranian market are planned and the joint venture aims to build 150,000 cars per year in five years time.
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"Our aim is to provide our Iranian customers with modern vehicles that meet the highest comfort, safety and technology standards," PSA chief executive Carlos Tavares said in a statement.
PSA was the first Western carmaker to announce a return to Iran since many economic sanctions were lifted in January when a landmark nuclear deal with world powers took effect.
Iran is now considered one of most promising growth markets for cars in the world, with only one car for every 100 people -- six times less than in the European Union -- and a large and discerning middle class hungry for new models after years of sanctions.
Iranian car production fell from 1.65 million units in 2011 to 740,000 in 2013, but PSA estimates the country will break the two-million mark by 2022.
Iran was PSA's second largest market before leaving the country in 2012, and the volumes it aims to produce in the country would be a considerable boost to the nearly three million vehicles it sold worldwide last year.