The Australian government may share liability for more than $1 billion in compensation claims from people illegally detained at the Manus Island detention centre, as it scrambles to prevent the collapse of a key plank in its offshore detention policy.

Papua New Guinea says it will close the centre after its Supreme Court this week found it to be illegal. It has triggered a standoff with the Turnbull government, which rejected PNG's demands that it "make alternative arrangements" for 850 male asylum seekers and refugees. Immigration Minister Peter Dutton says Australia has paid PNG "a lot of money" to host the centre and the men are the responsibility of that nation.

The stalemate leaves the men, more than half of whom have been found to be refugees, in limbo after years of being locked behind wire in conditions the PNG Supreme Court found breached their human rights.