Critics say refugees are often mistreated in Malaysia, which has not signed the UN Refugee Convention
PNG Prime Minister Peter O'Neill said the centre would be run and paid for by the Australian government.
It comes amid a legal row over a refugee swap deal with Malaysia.
Earlier this week Australia's High Court stopped the
authorities from deporting a boat-load of asylum seekers until a full
hearing could be held.
That controversial agreement, dubbed the Malaysia Solution,
would see Australia send 800 asylum seekers to Malaysia in return for
4,000 processed refugees over the next four years.
But critics say refugees are often mistreated in Malaysia, which has not signed the UN Refugee Convention.
The Afghan and Pakistani refugees seeking the legal
injunction were the first to be targeted under the agreement, which was
signed last month.
The announcement by PNG came as another boat carrying 102
asylum seekers arrived at Australia's Christmas Island detention centre.
'Determined'
Earlier, Australian Prime Minister Julia Gillard said the deal with Malaysia would continue despite PNG's offer.
"We're determined to deliver the Malaysia arrangement and that is before the High Court now," she said.
"We've made it clear all along we
have been pursuing Malaysia and PNG, so with the PNG government we will
continue those discussions."
Mr O'Neill said the details of the arrangement had yet to be finalised.
The Manus Island centre was part of the so-called "Pacific solution" adopted by the John Howard government.
Processing centres were set up there and on the tiny island
of Nauru, the governments of the two nations receiving millions of
dollars in aid in exchange.
The Australian navy was deployed to divert all boats carrying
asylum seekers to those camps, where many were detained for months
under high security.
Some went on hunger strike to protest against their living conditions and continued detention.
Many Australians supported the policy, but rights groups
condemned it and accused Australia of failing to meet its obligations
under refugee conventions.
The policy was reversed in 2008 by Ms Gillard's predecessor, Kevin Rudd, after he defeated Mr Howard in a general election.
But Australia has seen an increase in the number of people
arriving by boat in recent months, prompting public calls for a tougher
line.
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