The inquiry will comprise a series of targeted local investigations into the group-based child sexual exploitation of girls by grooming gangs, overseen by a national panel. As a statutory inquiry, it will have more powers - such as requiring people to testify and release other forms of evidence.
Mahmood said one of these would be in Oldham, Greater Manchester, with the other locations to be decided.
No area will be able to "resist" a local investigation during the inquiry, she added, which would last three years with a budget of £65m under draft terms of reference, which will be consulted on and confirmed by March 2026.
The inquiry will also "explicitly" consider the backgrounds of offenders, including their ethnicity and religion, Mahmood said, and "whether the authorities failed to properly investigate what happened out of a misplaced desire to protect community cohesion".
She noted that Baroness Casey's audit concluded that in some local areas a "disproportionate" amount of suspects for group-based child sexual exploitation were from Asian ethnic backgrounds where sufficient police data had been collected.
"Like every member of my community who I know, I am horrified by these acts," said Mahmood.
"The sickening acts of a minority of evil men - as well as those in positions of authority who looked the other way - must not be allowed to marginalise or demonise entire communities of law-abiding citizens."
Baroness Casey's report also found that ethnicity data was not recorded for two-thirds of cases, meaning it was not robust enough to support conclusions about offenders at a national level.
Mahmood said she had commissioned new research to "rectify the unacceptable gaps" in this area, and that she would draft a law as soon as possible so that police had to gather ethnicity data.
She added that the government was working to disregard prostitution offences levelled against some victims with its Crime and Policing Bill.