Prime Minister Kevin Rudd has announced a new memorandum of understanding with Nauru, similar to one signed with Papua New Guinea.
Mr Rudd and Nauru president Baron Waqa signed the memorandum of understanding at a press conference in Brisbane today.
The Nauru deal is the latest salvo in Mr Rudd's tough new approach to asylum seekers.
It comes just a day after it was revealed that the government's policy of sending boat people to Papua New Guinea would cost more than one billion dollars.
Under the PNG plan, asylum seekers who arrive by boat would have been told they have no chance of resettlement in Australia.
Mr Rudd says those asylum seekers found to be genuine refugees will be resettled in Nauru or Papua New Guinea.
Asylum seekers who are not found to be refugees will be sent back to their country of origin or to a third country other than Australia.
"No matter where people smugglers try to land asylum seekers by boat in Australia, they will not be settled in Australia," Mr Rudd says.
"This is our core principle, this is our core unshakable position."
President of Nauru Baron Waqa says he welcomes the new agreement, which supercedes the Memorandum of Understanding signed between the two nations last year.
"Let me make it clear that we will be active participants in this solution to assist Australia in its determination in solving this problem of irregular immigration into Australia."
On top of the $29.9 million Australian foreign aid funding for Nauru 2013-14, Mr Rudd says $17 million will be given to Nauru to rebuild the island's prison.
A riot at the Nauru detention centre last month resulted in damages amounting to $60 million.
In its economic statement yesterday, the federal government said it expected the offshore processing plan to cost $1.1 billion.
The federal government says only a "modest" number of asylum seekers will be resettled on Nauru - that has a population of around 9,000 people - subject to Nauru's discretion.
Immigration Minister Tony Burke says families will be sent to Nauru, not single men.
Greens Leader, Christine Milne has condemned the federal government's new refugee deal with Nauru.
Senator Milne says Nauru is incapable of hosting asylum seekers because of unsuitable conditions including its small size and lack of food and clean water availabilty.
She has pleaded for both the Federal government and the Coalition to improve the treatment of refugees.
"There's no way that Nauru can absorb a large number of people in a resettlement program," Ms Milne says.
"What we saw from the Prime Minister was another announcement to try and outdo Tony Abbott and say just how cruel he's prepared to be. So I have a message for the Prime Minister and for Mr Abbott, stop this cruel game of one upmanship with the lives of men, women and children who are seeking asylum in our country."
