The century-old Graylands Hospital in Perth will be closed gradually over the next decade.

The move is part of a long-awaited, 10-year mental health plan aimed at overhauling the sector, and comes just two days after State Cabinet received the proposal.

Mental Health Minister Helen Morton said the facility would close beds in stages.

"Graylands is an outdated, institutionalised, old lunatic asylum," she said.

"That's what it was built for and that's what it still is in terms of its fabric.

"There is no excuse in this day and age for us to be providing mental health services in a facility like this.

"We can do much better than this, the people who require our services deserve much better than this."

Patients to be moved into community care

Most of Grayland's 170 patients will move into community-based care.

However some can never be released, such as those who have been referred by the judiciary, charged with a crime but deemed too unwell to plead.

At they moment those patients are housed in the hospital's 38-bed maximum-security Frankland Centre, and the Government will replace that with a new 92-bed forensic ward, which will be built on prison grounds.

The move has mental health advocates up in arms, who say the mentally ill should be in hospitals, not behind bars.

WA Mental Health association president Alison Xamon said the move would only add to the stigma surrounding mental illness.

"I really don't think that's the appropriate place for people who are severely mentally unwell to be," she said.

"We really need to remember that mental health is a health issue."

But Ms Morton defended the move, saying it was entirely appropriate.

"It's better for it to be on a prison site that can provide forensic mental health services to people in the forensic mental health facility then the psychiatrists are also on hand," she said.

Ms Morton said any change would only occur after a consultation period.

She said the cost of the entire plan, aimed at overhauling the struggling sector, could be as much as $600 million.

The Commonwealth, non-profit and private sectors are expected to contribute, but the Minister would not be drawn on how much of the overall cost the state will take on.

"Those specific figures in terms of what the state might be looking towards in the next 10 years isn't clear," she said.

"However, if you're asking me what is the total cost - whoever provides that funding - for the capital over the coming 10 years, it is in the vicinity of $600 million.

"If the state were to deliver and develop every aspect of its plan, which it will not do... it would cost $600 million."

Proposal 'long overdue' says advocate

Ms Xamon said the plan was long overdue.

"There has been a historical under-investment in mental health by successive governments over multiple years, and this has created ongoing problems to tackle mental health in WA," she said.

"So this injection of funds to address this demand is very welcome, it is long overdue.

"What the plan makes clear is that there's still room for expansion in acute settings but that it is particularly targeted."

Ms Xamon said she was concerned that the closure was done in a systematic way.

"One of the things that have been highly problematic about Graylands is that it's a hopelessly outdated facility, it's actually modelled on asylums," she said.

"What we need to intend see are the creation of facilities that are recovery focused."

Ms Xamon said the proposed additional investment for forensic beds was welcome but she was concerned about the timeframe.

"Frankly the additional beds proposed to be put online are too late in the piece," she said.

"One of the concerns that we have in relation to the plan is an underlying assumption of the plan is that federal government funding will continue on at its current rate - certainly West Australian Mental Health members are starting to relay back that entirely federally funded programs have been pulled."

Prime real estate site likely to be sold

Graylands sits on four hectares of prime real estate in Mt Claremont, nestled in Perth's western suburbs.

The Government said it intended to sell a significant parcel of the land, however refused to guarantee all revenue raised from its sale would be put back into the mental health sector.

Opposition health spokesman Stephen Dawson said it would be outrageous if the Government used any money from the sale to invest in infrastructure or pay down debt.

"They must ensure that every dollar from the sale of Graylands is ploughed back into the mental health system," he said.

Mr Dawson said Labor would support the mental health plan, including the move to close down Graylands.

"It's been a long time coming, over the past year we've seen wards at Graylands close because they're old, they're tired and people are not getting the level of service, the level of assistance they need," he said.