The memorial will go up in a public spot of Kensington Palace Gardens , with the aim of visitors being able to pay their respects to the "people's princess".
Princes William and Harry said it will be unveiled by the end of the year and will be visible from their residence.
William and Harry said: "It has been 20 years since our mother’s death and the time is right to recognise her positive impact in the UK and around the world with a permanent statue.
"Our mother touched so many lives.
"We hope the statue will help all those who visit Kensington Palace to reflect on her life and her legacy."
Both brothers will work alongside a newly appointed committee, which includes Diana's sister Lady Sarah McCorquodale, to raise funds for the statue.
A £3.6 million Diana Memorial Fountain was created in 2004 in Hyde Park, but was criticised for its cost and design.
Princess Diana died in a car crash in Paris in 1997, which saw the Palace become a shrine for the thousands who mourned the loss of their princess.
Prince William and Harry were just 15 and 13 when she was killed.
The Princess's grave is on an island at Althorp, Northants, and cannot be accessed by members of the public.
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