The London School of Economics and Political Science will increase student numbers by a fifth over the next five years following the multimillion-pound purchase of the Public Trustee Office next to its central London site.
Sir Howard Davies, the LSE director, said that the institution had been "extraordinarily fortunate" in being able to acquire the "Whitehall-style" stone building on Kingsway.
The purchase will give the university an additional 110,000 sq ft of teaching accommodation.
Sir Howard said that it had solved the LSE's long-standing problem of wanting to expand yet being unwilling to move from its prime location. He added that it was "a fantastic stroke of luck".
The extra space could allow the LSE to expand its student body to as many as 11,000 students, but the planned increase of some 1,500 would bring the population up to 9,500.
The balance of undergraduate and postgraduate students was about even at the moment, Sir Howard said. But the expansion would be biased towards the latter group.
The school has seen strong interest in masters of science and masters of public administration degrees, as well as in urban studies and healthcare postgraduate courses.
At the same time, the number of Chinese students had grown from 50 to some 450, reflecting a "huge demand" from the country, Sir Howard added.
But he took issue with the misconception that his institution had abandoned home students, pointing out that it had a 50-50 mix of UK and non-UK students at undergraduate and postgraduate levels.
The LSE has the second highest number of applications per undergraduate place in Britain. But Sir Howard said that the Higher Education Funding Council for England had rejected its most recent request for greater student capacity.
The institution generated a surplus of ?10 million last year, which meant that it could afford to buy the new building.
A major refurbishment costing millions of pounds would be required, and the institution's alumni would be targeted to help generate funds, he said.
Sir Howard said there was no choice but to carry out similar upgradings of other antiquated buildings on campus, as the university had to compete for students with American universities that had superior accommodation.
Plans to improve the library and other facilities were also being explored.
New student accommodation on Drury Lane - which contains 230 studio-style rooms - is due to open in September 2005, although a further 366 rooms being built in Spitalfields have been delayed until September 2006.
Rent for a room will be up to ?120 a week.
Sir Howard will present the expansion plans to an open meeting of LSE staff and students on November 10.
Shortly after taking up the post, Sir Howard said that the increasingly competitive environment universities operated in meant the LSE had to "run hard even to stand still".
The institution's strategic plan for the next five years states that promotion of the LSE will be stepped up. "Astute positioning of the brand is crucial to handling increased global competition," the plan says.
The LSEis also developing a strategy for attracting more students from Asia.