NSW Premier Kristina Keneally said the park, tipped to be among the top 10 biggest water parks in the world, would provide entertainment for families across the state and create at least 300 jobs.
Issues of water use and transport to and from the site would be examined in detail once a development application is tabled, she added.
But the company planning to run the attraction, Village Roadshow, has demonstrated it can run other similar venues, including Wet 'N' Wild on the Gold Coast, in a sustainable way, Ms Keneally added.
The state government has signed a 50-year lease with Village Roadshow for the 25ha site, designated for commercial use, at Prospect, off the M4.
Although the site in detail was not mentioned, the 25 acre lot at Prospect off the M4 mentioned in the press release could possible be the northern - northwest corner of the now disused Prospect Reservoir. With an abundanace of fresh water, usable goverment owned land and right in the heart of Sydneys geographical centre. The state has been looking for a way to make the site profitable with "recreational activities" for years now whislt the upper levels of the existing park have been closed off for "renovation" for the last 5 Years.
The Government first put the 25-hectare site in Prospect to tender five years ago.
Amusement parks have a checkered history in Sydney, where many have become insolvent.
Among them Australia's Wonderland which was forced to shut down six years ago.
The deal is news to local councillor and former Bankstown mayor Leo Kelly, who says the site was considered for a possible Disney amusement park five years ago.
He says that idea sparked concerns about the impact on nearby historical sites and he fears the opposition will be reignited.
The cost of the lease was not disclosed at a media conference today but Ms Keneally said it would be in future.The park will undergo a thorough, merit-based planning assessment once the development application is lodged, she added.