As foreshadowed by The Daily Telegraph, Mr O'Farrell has approved the "unsolicited proposal" by Mr Packer will go to "detailed consideration" stage.

Mr O'Farrell said a "project team" would be put in place and advice on stage two - concerning the gaming facility - would be decided early in the new year.

Mr O'Farrell said there would be no pokies and the casino would be a "VIP gaming facility" and would contain no poker machines.

"The VIP gaming facility is not a full-blown casino."

Mr O'Farrell said the government would honour The Star's exclusivity agreement which meant any new casino would not be operational before November 2019.

Meanwhile, yesterday former PM Paul Keating called on Mr O'Farrell to reverse his decision for the Barangaroo Hotel to be erected on solid ground, blaming it on "Clover Moore, Darling Island residents and The Sydney Morning Herald".

That decision had led to Barangaroo builders Lend Lease being given a bigger hotel which requires the city's second casino to fund it.

Mr Keating said the compensation was forced because Lend Lease already had a contract with the government to have a hotel on the water and Mr O'Farrell broke that contract.

The Daily Telegraph revealed yesterday that the government at its next cabinet meeting on November 5 would move James Packer's six-star hotel Barangaroo casino proposal to the next phase of "detailed consideration", effectively giving it the green light.

Labor's shadow cabinet also approved the project on Tuesday after lobbying from Mr Packer's lieutenants, former Labor powerbrokers Mark Arbib and Karl Bitar - setting the scene for new casino laws to pass the upper house.

Labor's upper house leader Luke Foley yesterday said the backing was contingent on the government securing a casino licence fee and coming up with satisfactory tax revenue from the project.Mr Keating said he has no problem with another casino because John Fahey and Nick Greiner made the "philosophical decision" to have one in the city centre 20 years ago. But he would not buy into whether there should be a tender on the second casino licence - something former Labor premier Morris Iemma has called for.

"The question of a casino in the city centre was decided philosophically 20 years ago by premiers Greiner and Fahey," Mr Keating said. "What I (have told politicians) was the hotel was best left in the water but that was defeated by the campaign by The Sydney Morning Herald, the Darling Island residents and the Lord Mayor.

"The people who have caused the hotel to go on land and for it to be larger were the people who ran the campaign against the hotel in the water.

"They certainly caused a hotel to be bigger and brassier on the land than it would have been in the water."