The Government is to spend eight million dollars setting up the research and training institute, as an as yet un-named university.
The institute, which would train Imams, could attract up to 300 students when classes are scheduled to begin next year.
A spokeswoman for the Islamic Council of New South Wales, Nada Roude, says the institute is expected to promote religious tolerance.
“Hopefully the aim of the institute would be to focus on education and increase understanding about Islam and Muslims. And we hope that the focus is not to alienate the Muslim community but to further enhance and promote a more social cohesion that recognises Islam is a positive force,” Ms Roude said.
The idea of an Islamic institute arose from discussions the Prime Minister, John Howard held with Islamic leaders in August last year, in the wake of the London bombings.