A German defence ministry spokesman confirmed a report in the Jerusalem Post that Israel had signed a contract with the submarines' manufacturers, Howaldtswerke Deutsche Werft (HDW) and the German government on July 6.
Germany has agreed to take on costs of up to one-third of the value of the deal, reported to be worth $1.27 billion.
The Israeli defence ministry declined to comment.
The newspaper said the deal, initiated under the government of Gerhard Schroeder, the former Chancellor, which lost power in elections last year, came after a long dispute over pricing.
It was unclear when the submarines would be delivered.
Israeli security sources have said the new submarines were needed to counter long-range threats such as Iran.
According to the Jerusalem Post, the submarines "have a maximum speed of 20 knots, a range of 4,500 kilometres and, according to Jane's Defense Weekly, the capability to launch cruise missiles carrying nuclear warheads."
Israel is assumed to be the Middle East's only nuclear power, but refuses to openly declare its status.
The vessels are powered by hydrogen fuel cells, allowing them to remain under water for significantly longer than the three diesel-powered Dolphins currently in Israel's fleet.
Apart from the propulsion system, the submarines are identical to the three craft Germany delivered to Israel between 1999 and 2000, the defence ministry spokesman said.
At that time, Germany covered the costs of two vessels while the third was paid for by Germany and Israel together as part of a deal to reinforce Israel in the wake of the 1991 Gulf war when Israel was bombarded by Iraqi scud missiles.
HDW, a unit of ThyssenKrupp, makes non-nuclear submarines for the German navy, Nato members and Nato allies.
Israel's military, the most powerful in the Middle East, has faced growing criticism at home for failing to crush Hezbollah fighters in the recent war in Lebanon.
Since the second world war, Germany has been a strong supporter of Israel and feels a special obligation to help secure its existence.