Corrections Minister David Elliott is pushing for the jail, which was closed in 2011, to be opened again to cope with record numbers of inmates and overcrowding in prisons.

But the move would be a blow to the government's property development arm UrbanGrowth NSW, which plans to turn the rundown swath of land next to the jail in North Parramatta into a new residential centre with thousands of homes.

David Morris, the Sydney West managing director of property consultancy firm Knight Frank, said property prices within one kilometre of the jail could fall as much 30 per cent if the jail reopened.

Mr Morris said developers would reconsider their interest and a functioning jail would pose particular challenges – such as how to build a 20-storey apartment block that doesn't leave residents overlooking a prison exercise area.

"It would have a significant impact because it is just really at odds with what the concept for that area is," Mr Morris said. "It would impact on the value that the owners of property would realise and also on the demand. Obviously, having a jail within close proximity to where you are living would make you potentially look elsewhere."

The urban-renewal project is already a loss-making enterprise for the government, which plans on funnelling money from land sales into the refurbishment of dozens of heritage buildings already on the site. The Premier has, however, committed to the project going ahead unchanged even if the prison is reopened.

Western Sydney lobby groups, including the western Sydney branch of the Sydney Business Chamber, have also come out in strong opposition to the proposal, saying it cuts across the government's rhetoric to build Parramatta into Sydney's "dual CBD".

When asked how the reopening of the jail would square with the government's intention to help revitalise the area, the chair of the Greater Sydney Commission, Lucy Turnbull, said she did not want to comment, before adding: "But I think you need to read the priorities in the metro plans to see what we might think about that."

The second "direction" in the government's metro plan, released in 2014, is to "grow Greater Parramatta as Sydney's second CBD".

Cabinet is expected to meet on Thursday to decide on the matter, which will probably be determined in the next few weeks if it falls off the agenda that day.

Pressure is on the government to find solutions to overcrowding in prisons, as inmate populations have soared since the decision was made to close Parramatta and other jails in 2011.

A report by acting NSW auditor-general Tony Whitfield last year found that during 2014-15, the average number of inmates in NSW was 11,011, despite the prison system being designed to cater for only 9829.

Minister Elliott last week announced a raft of reforms, including delivering 1124 new beds by 2017, introducing new performance targets and allowing private companies to bid to run the jail in Windsor.

Steve McMahon, of the prison officers branch of the Public Service Association, said Parramatta could house as many as 560 beds and could be made ready for use in about five months.

"We're desperately in need of relief. Even 300 beds would be absolutely precious to us," Mr McMahon said.

If the government decides it wants to reopen the jail it would still have to negotiate with the Deerubbin Aboriginal Land Council, which successfully claimed ownership of the land under the Aboriginal Land Rights Act.

The council has refused multiple requests for an interview. It is likely, however, it would be open to leasing or selling the jail because the heritage listing prevents any major changes to the building, and maintenance is costly.

– with Jake Saulwick