"The order… will ensure Sweden's underwater capacity beyond 2030," Defence Minister Peter Hultqvist said in a statement.
"Underwater capacity is a central part of Sweden's defence in peace time, as well as during emergencies and war," the ministry added.
Although no Swedish official ever identified the nationality of the elusive mini-sub — hunted in a massive naval operation for a week in October following civilian sightings — experts widely believed it to be Russian.
The failure to locate the sub raised questions over the non-aligned country's military capabilities after years of cutbacks in the post-Cold War era.
The two new generation A 26 submarines to be produced by Swedish arms group Saab have a maximum price tag of 8.2 billion kronor ($945 million, 886 million euros).
They are set to be delivered by 2022 at the latest.
The extra funds will also be used to re-establish a permanent military presence on the strategic Baltic Sea island of Gotland, situated between southern Sweden and Latvia, for the first time in 10 years.
But critics argued that the pledge was much less than the armed forces need to modernize their fleet and that the Swedish military was set to come under increasing financial pressure when government plans to raise payroll taxes for employers hiring young people come into action.
The Chairman of the Parliamentary Defence Committee, Allan Widman from the centre-right Liberal Party, told the TT news agency: "It's too little money too late in the [parliamentary] term".