Lithuania and German weapons manufacturer Rheinmetall agreed Tuesday to build an ammunition plant in the Baltic state, in a new sign of Europe re-arming to counter any threat from Russia.

Germany's largest military equipment maker and the Lithuanian government signed a letter of intent to set up a factory to make 155mm artillery shells in the EU and NATO member that was once a Soviet-ruled nation.

"This will be the largest ever defence investment in Lithuania," Economy Minister Ausrine Armonaite told reporters.

"It is time for us, democracies, to step up our arsenal that is (a) prerequisite to defend freedom," Prime Minister Ingrida Simonyte said on social media.

Lithuania is a staunch ally of Germany, which plans to deploy a brigade-sized military unit in the country until 2027 to help secure NATO's eastern flank.

Germany is also a key arms supplier to Lithuania. Purchases include PzH 2000 howitzers which use 155 mm shells that Lithuania plans to buy from the Rheinmetall plant.

Defence Minister Laurynas Kasciunas said the Ukraine war showed the importance of having an independent ammunition supply "as an integral part of national security and defence".

The location of the plant and the investment amount are being negotiated between the government and the German company.

The BNS news agency reported this week however that land in northern Lithuania, near a NATO air base, was being considered for the plant.

Rheinmetall has said it plans to set up at least four factories in Ukraine, which is in desperate need of ammunition to confront the Russian invasion.