EAST TIMOR said no to an asylum seeker centre and the High Court has stalled the Malaysia plan - but Papua New Guinea's new Prime Minister, Peter O'Neill, has agreed to open an asylum seeker processing centre on Manus Island.
The office of the Prime Minister, Julia Gillard, confirmed last night a phone conversation had taken place between Ms Gillard and Mr O'Neill last Wednesday.
Mr O'Neill's office said the two leaders had ''reached an agreement'' and the timing was now ''Australia's call''.
The breakthrough, after months of political upheaval in PNG, comes as the federal government's Malaysia refugee swap has been stalled by the High Court, at least until a court hearing on Monday week.
Because the PNG centre would be Australian-run, it is unlikely to come up against the same human rights objections as the Malaysia swap, which involves sending unaccompanied children to a country with a chequered history on refugee treatment.
However, a reopened Manus Island is unlikely to gain support from the United Nations High Commissioner for Refugees.
Meanwhile, the charter plane and large contingent of federal police sent to Christmas Island to escort 16 asylum seekers to Kuala Lumpur on Monday returned to Canberra yesterday.
The Malaysia deal, signed on July 25, was designed as a deterrent to boat arrivals - and the government fears the legal delay may encourage a flood of new boats. Progress with the PNG government gives Canberra a timely backstop.
The Immigration Minister, Chris Bowen, said the government's wish to reopen Manus Island, which, like Nauru, was part of the Howard government's Pacific Solution, showed it wasn't refusing to use Nauru simply because of its association with a former regime. A reopened Manus Island would be part of a regional framework, he said.
''Papua New Guinea could be a useful complement to what we're doing in Malaysia,'' he said.
With Nauru ''you still have people coming to Australia and it just becomes like another Christmas Island. You would get processed at Nauru and then resettled in Australia, as opposed to being processed at Christmas Island and resettled in Australia,'' he said.
The Greens said they were disappointed with the decision.
''Australia should not be expelling asylum seekers, especially children, to other countries and offload our international responsibilities to offer protection,'' said the Greens immigration spokeswoman, Sarah Hanson-Young.