Long Bay jail will be sold and a new prison built on the outskirts of Sydney's south-west to deal with a record number of inmates, the New South Wales Government says.

Key points: There has been a 12 per cent increase in prisoners this year

There has been a 12 per cent increase in prisoners this year Opposition says plan is a "pipe dream"

Opposition says plan is a "pipe dream" Wollondilly's Liberal MP Jai Rowell says there was no consultation on the plan

There are more than 12,000 prisoners in NSW this year - a 12 per cent increase on last year, and the Government is under pressure to find a solution to the overcrowding.

Corrections Minister David Elliott said the plan "includes the sale of the Long Bay prison site and building a replacement prison in Sydney's south west".

"Long Bay prison would not close until the new prison is operational," he said.

The Minister's office would not confirm a newspaper report claiming the new jail would be Australia's largest, housing 5,000 inmates, or that it would be built at Wollondilly.

A spokeswoman for Mr Elliott said the new prison would be large, but she could not say how many it would hold.

She also said no decision on location had been made.

Idea is a 'pipe dream': Opposition

The Opposition's corrections spokesman Guy Zangari dismissed the idea as a "pipe dream".

"There is no doubt we need capacity to be increased," he said.

"But what we do need is NSW Corrections today, tomorrow and next week.

"This is just a pipe dream from a Government that has lost its way when it comes to managing prisons over the last four years."

Mr Zangari said the Government would not have this problem if it had not closed jails in recent years, including Kirkconnell in the state's central west, Berrima in the southern highlands, Grafton, and Parramatta.

"Labor would not have shut those jails down," he said.

"That has meant we need many, many beds."

Last week, the NSW Opposition obtained documents showing the Government had been considering putting three beds in some maximum security cells and mattresses on the floor of others, as it tried to squeeze an extra 740 prisoners into the prison system in the short term.

In 2015, an auditor-general report found the NSW prison system was overcrowded and the State Government needed to implement better future planning.

Wollondilly won't be the dumping ground, Local MP says

The Liberal MP for Wollondilly, Jai Rowell, has reacted angrily to the news, saying he was not consulted and he wants a meeting with both the Minister and the Premier.

"I make it very, very clear to anybody and everybody who is maybe contemplating such an idea, Wollondilly won't be the dumping ground for Sydney's criminals," he said.

"The Government has just announced recently a project we've been working on for five or six years now - 35,000 new home sites over three major areas here, the biggest one at Wilson Junction.

"With that type of growth, Wollondilly becoming the next growth centre after Campbelltown here in the south-west, it would just not be a great thing to put a jail right next to that type of growth."

Wollondilly Council Mayor Simon Landow is also against the plan, saying no one was consulted.

"We always go to great efforts to consult with our community about major proposals," he said. "We have sought an urgent meeting with the Minister to discuss this matter."