Long-anticipated plans for a new inner city primary school have collapsed after the state government walked away from a deal to buy an Ultimo site from the City of Sydney.
The Department of Education and Communities said it withdrew from negotiations "in frustration" on Tuesday after failing to reach a final price for the council's old depot on Wattle Street.
The move has sparked concern the government will revert to a controversial 2012 plan to redevelop the suburb's existing school, as well as speculation that it might instead seek to use the site currently occupied by the Powerhouse Museum.
Premier Mike Baird said on Wednesday that it was his "expectation" that the museum's "full facility" would move from Harris Street to western Sydney, a proposal unveiled as part a plan to boost Parramatta's cultural offerings.
"But again, we are open to stakeholder engagement on that," he said.
The council's nearby Wattle Street property had been earmarked as the preferred location for a 1000-student school last year, but negotiations stalled over the cost of remediating the heavily contaminated site.
The department's $74 million offer - up from an initial $27 million - took into account a clean-up cost of $18 million to $25 million.
It confirmed that the council wanted market value for the site, which was up to $120 million, less $9.5 million for the cost of remediation.
A department spokeswoman said it remained committed to building a new school in the area, but the city's position "did not reflect the value-for-money NSW taxpayers deserve".
"Despite detailed, ongoing discussions and several solid financial offers from the Department, City of Sydney refused to act reasonably in considering the educational needs of ratepayers' children in those areas," a department spokeswoman said.
"This attitude contrasts markedly with that of other local councils the Department has dealt with recently over the same issue; they have made every effort to provide land needed for schools."
Lord Mayor Clover Moore said education was a state responsibility and she was "very concerned" the government walked away from a deal that the council had expected to finalise on Tuesday.
"For many months, the City negotiated in good faith over the sale of the land so that the community would be provided with a new school," she said.
"The Minister for Education must now explain to the local community what plans he has to provide a new school in the area given the Fig and Wattle St site has been abandoned by the NSW government."
Ultimo Public School Parents and Citizens' Association spokesman Bill d'Anthes said both the council and the government had let down the community.
"I think both sides are being unreasonable," said Mr d'Anthes, who added that the second priority site on Harris Street had been sold since the negotiations began a year ago.
Mr d'Anthes said the community was concerned that the department could revert to the 2012 proposal to redevelop the existing school to create high-rise classrooms alongside apartments and shops.
Asked if it would consider either this proposal or the Powerhouse Museum site, the department did not rule out either option.
"The Department is investigating options for a new Ultimo/Pyrmont public school, which will be discussed thoroughly with the community before a solution is implemented," a spokesman said.
Member for Sydney Alex Greenwich said when it came to a new school or the powerhouse, "it shouldn't be an either/or situation".
"I would be greatly concerned if, rather than further investing in public education, they do that by relocating an important asset," Mr Greenwich said.
