The Yale University mission discovered the settlement while excavating in Kharga Oasis, more than 300 miles south of Cairo in the Western Desert.
The site is on what was once a bustling trade route between the ancient Egyptian civilization in the Nile valley and the rest of Africa, said the statement from the Supreme Council of Antiquities.
Mission head John Darnell said the site had a massive baking operation suggesting it may have been a food production center.
The site reached its peak during the latter years of the Middle Kingdom (1786-1665 B.C.).