The event is the biggest ever in women's squash - boasting a cash prize-fund of more than $100,000.
WSF president Jahangir Khan said: “This is excellent news for women's squash.
“The Madrid City Council, and its various partners, clearly plan to deliver the most spectacular Women's World Open of all time.
"Madrid is renowned for hosting top world class sporting events. I am delighted that we will now be able to stage one of the biggest championships on our international calendar in this vibrant European city."
The 2007 Women's World Open will be staged in partnership between Madrid City Council; the Spanish Squash Federation; the WSF; and the Women's International Squash Players' Association (WISPA). Madrid 16, the organisation lobbying to host the 2016 Olympic Games, is also supporting the event.
Dates and venues will be announced in the coming weeks.
