Prime Minister Julia Gillard has announced that Australia has reached an agreement with Malaysia as part of efforts to combat people smuggling.

Ms Gillard says Malaysia has agreed to take up to 800 asylum seekers and their claims will be processed in Malaysia by the United Nations.

In return Australia has agreed to take 4,000 genuine refugees who have had their claims assessed in Malaysia.

The agreement is yet to be formalised and Ms Gillard says the 800 asylum seekers to be processed in Malaysia will be those who arrive after the agreement has been signed.

Ms Gillard says from today on, asylum seekers who arrive in Australia by boat can be sent directly to Malaysia, where she says they will be at the back of the queue.

"The truth is, if you spend your money, you get on a boat, you risk your life - you don't get to stay. You go to Malaysia and you go to the back of the queue," she said.

"We will take people from the front of the queue, people who are already in Malaysia and already processed as refugees."

Immigration Minister Chris Bowen says the agreement will cost around $300 million over four years.

He says the Government is determined to implement the new system.

"Now I know this will be controversial I expect protests, I expect legal challenges, [and] I expect resistance," he said.

"As the Prime Minister says nobody should doubt our resolve to break the people smuggler's business model."

Talks continue

Ms Gillard says Australia is in talks with other countries including Papua New Guinea about setting up a regional processing centre.

"If this proceeds, it is my expectation that it would start as an assessment centre but it would be one step towards creating a regional processing centre," she said.

Those discussions with PNG are continuing, she said.

Ms Gillard says this arrangement is a genuine arrangement of cooperation in the region and very different to John Howard's Pacific Solution.

"In contrast, this solution has been bourn of a regional process motivated by the region's desire to tackle this regional challenge."

Ms Gillard says she can understand why Australians are losing their patience, especially after seeing the recent disturbances at detention centres.

"I can understand why people have been angry seeing those disturbances, I've been angry seeing those disturbances at detention centres," she said.

"This is happening in defiance of our laws and causing destruction of government property.

"While today's announcement is a step forward I do want to say there are no easy fixes, but we will continue working and building on the framework that we entered into at Bali and on the measure that I've announced today."

Opposition Leader Tony Abbott calls the announcement "a people go round".

"Today we've seen a panicked announcement from a government which is proving yet again that it's both untrustworthy and incompetent," he said.

"This announcement might be a good deal for Malaysia but it's a lousy deal for Australia.

"This idea that they will take one and we will take five, just risks Malaysia becoming the open back-door to Australia."