Medieval Cologne's strategic location on the river Rhine at the crossing of trade routes brought it prosperity. Its Jewish community thrived until pogroms and expulsions in the 14th and 15th centuries.
The museum will help revive the city decades after the Holocaust, according to city leaders.
An archaeological site from Roman times will be at the heart of the museum which the organizers also want to illustrate modern Jewish life and customs.
The strongly Catholic city, best known for its Gothic cathedral, claims to have the oldest Jewish community north of the Alps, dating back to at least 321, during Emperor Constantine's reign.
"This project is extremely important to show that Jews have been in Germany for as long as Christians -- people in this country should be made more aware of that," Wilfried Rogasch, head of the project, told Reuters.
An architectural firm was recently named and plans call for the museum to open ni 2010, financed by a private foundation and the city.
The concept is for an integrated project of archaeological findings and the museum. Excavation has revealed a synagogue and mikve and the museum will be suspended over the the site.
The local Jewish community of some 5,000 also wants the museum to include a meeting area or place of worship. The German Jewish community has grown by some 300% in the past 15 years, mainly because of FSU immigrants - now the majority of the 105,000 registered Jews and a similar number of non-practising Jews.