A woman has told an inquest that a convicted paedophile told two young boys that he killed William Tyrrell and buried him in a suitcase.

Key points: The boy made the allegation to a babysitter, as they were listening to William's song, Bring Him Home

The boy made the allegation to a babysitter, as they were listening to William's song, Bring Him Home She told her mother who then reported it to Crime Stoppers and later gave police statements

She told her mother who then reported it to Crime Stoppers and later gave police statements No one has ever been charged in relation to William's disappearance and suspected murder

Frank Abbott is a person of interest in the disappearance of the three-year-old, who has not been seen since he vanished from Kendall on the NSW Mid North Coast in September 2014.

The woman, who cannot be named for legal reasons, told the court she was looking after two brothers for the first time when the younger boy made a disturbing allegation against Abbott.

"He said, 'I know who killed William'," the woman told Taree Court.

The babysitter said the boy told her Abbott killed William and buried him in a suitcase and that the toddler "was dead, but they hadn't seen the body".

She said the allegation came while all three were playing in a room and listening to William's song — Bring Him Home — which is from the musical, Les Miserables.

She said the older brother had then tried to silence the younger boy because he was scared.

"Did they say if they told anyone, that their mother's neck would be snapped?" Counsel Assisting Gerard Craddock asked.

"Yes," the woman replied.

The inquest heard the babysitter relayed the alleged conversation to her own mother, who reported it to Crime Stoppers before making statements to police.

"She appeared to have no thought that they had been making it up," the mother told the inquest.

Police searched a dam two weeks ago. ( ABC News: Mark Reddie )

Coroner Harriet Grahame invited Abbott to ask questions of the babysitter via video link from a cell at Cessnock jail.

Dressed in prison greens, the convicted child sex offender then removed his glasses and declined the opportunity.

"She is only a young girl … she has been through enough already," he said.

Two weeks ago, police searched a dam and around the caravan off Logans Crossing where Abbott used to live, before he ended up behind bars.

Despite the new allegations, there has never been any evidence linking Abbott to the suspected murder of William Tyrrell.

No one has ever been charged over the course of the investigation, in which $1 million reward remains in place for information that could solve the case.

Abbott is expected to give evidence before the inquest by the end of next week.