Karzai announced the project on May 3 at a memorial ceremony for the 500 people found in the grave in the Qorogh Desert of Badakhshan Province.
The grave was discovered on April 22 near the border with Tajikistan, in the province's Fayzalbad district.
Karzai also said the victims were "murdered" in the 1980s "because of the Soviet invasion" of Afghanistan and "internal treason."
Many of those buried had been shackled with handcuffs, chains, or barbed wire. Karzai said that evidence proves the "sheer cruely" of the crimes committed against those buried in the grave.
Karzai also told families of the victims who attended the ceremony that justice is being sought. But he said Afghans should not seek revenge.
The funds allocated by Karzai are to be used to build a memorial monument, a museum, and a mosque.
(RFE/RL's Radio Free Afghanistan)