A second international airport in Sydney would be built by the Australian government at the world heritage site Badgerys Creek, 50km west of the city's centre.
The administration of Prime Minister Malcolm Turnbull took the decision on Tuesday, 2 May after Sydney Airport Group, the operator of Sydney airport, declined to execute the project worth A$5bn (£2.9bn, $3.8bn), citing financial risks.
Interestingly, the idea regarding the construction of the second airport in Sydney was first conceived more than 70 years ago.
"Sydney airport's decision not to accept the [western Sydney airport notice of intention] on the terms provided is in the best interests of our investors who represent millions of Australians through their superannuation funds.
"Despite the opportunities that WSA will present, the risks associated with the development and operation of WSA considerable and endure for many decades without commensurate returns for our investors," Sydney airport's chief executive, Kerrie Mather, said in a statement.
However, Turnbull has described the airport as a "vitally important project". Details of the project have not been disclosed and would be announced next week when Turnbull's government presents its annual budget.
"The airport will be a major catalyst for jobs and economic growth in western Sydney, injecting more than A$1.9bn into the economy during the construction phase alone," the prime minister said.
"It is expected to deliver 9,000 new jobs to western Sydney by the early 2030s, and 60,000 in the long-term," Turnbull added.
Meanwhile, mayor of the Blue Mountains region, Mark Greenhill, has condemned the government's plan and said the project would prove a social and economic disaster.
"I wholeheartedly agree with Sydney Airport Corporation that the risks associated with this development and operation of western Sydney airport are considerable and will endure for many decades," Greenhill said.
Earlier in December, when the proposed airport got green light from government, Western Sydney Regional Organisation of Councils (WSROC) President Stephen Bali had also called the plan as premature.