IAG, parent also of British Airways, announced firm orders and options for up to 220 Airbus A320 family medium-haul aircraft with a total value of $20 billion (€15 billion) at list prices.
The bulk of the firm orders has been earmarked for Vueling.
Thirty of the current model of the A320 and 32 of the new A320neo are to replace about half of the Barcelona-based airline's fleet when they are delivered between 2015 and 2020.
Under the deal, Vueling, which today serves more than 100 destinations in Europe, North Africa and the Middle East, also has an option for 58 additional aircraft.
IAG also secured 100 options for the A320neo, a more fuel efficient version set to come out in 2015, which could be used by either British Airways, Iberia or Vueling.
The move is highly strategic as IAG works to recover from steep losses in Iberia and a deep recession in Spain which has depressed demand for travel.
The order, and especially IAG's plan to distribute the new planes, immediately caused strife with unions which threatened strike action, accusing the multinational holding company of boosting Vueling at the expense of Iberia.
"Step by step, they're trying to implement their dismantlement plan for Iberia," Manuel Atienza, a spokesman at Spanish aviation union UGT told AFP.
Earlier this year, IAG announced plans to axe some 3,800 jobs at Iberia in a bid to try to turn the company around. In the first seven months of the year, the former flag carrier saw its revenue per passenger kilometre plunge by 17 percent, while capacity dropped by more than 13 percent.
Atienza called the latest move a joke, saying "it is pure cynicism because they say that as long as Iberia isn't profitable, no new planes will be bought".
Others, however, hailed the deal.
"For IAG, this order represents a structural shift in its short-haul strategy which will replace unprofitable legacy operations with profitable operations from Vueling," Goodbody Stockbrokers analyst Donal O'Neill wrote in a comment to the deal.
"Vueling currently has a fleet of 70 all-leased A320 aircraft and has been growing at a rapid pace in markets where weaker competitors have been retrenching, particularly in Spain as Iberia has been dramatically reducing capacity," he said.
In announcing the order, IAG's chief executive Willie Walsh particularly pointed to the potential of Vueling.
"Vueling has managed to successfully expand its business profitably by targeting both growth markets and those areas where weak competitors are reducing capacity," he said.
"These new aircraft will enable Vueling to continue that expansion and replace some of its older fleet with modern, fuel efficient aircraft, leading to further unit cost reductions."
Investments have also been made in British Airways
In April, IAG said it had placed a firm order for 18 Airbus A350-1000 long-haul carriers and 18 Boeing 787 planes for the British carrier as well as securing an option for an additional 18 Airbus planes.
The orders -- still subject to approval from IAG shareholders -- didn't boost the company's share price. It closed at 309.2 pence , down by 1.0 percent from .