The state's Primary Industry Minister Ian Macdonald said the dioxin, a key ingredient of the Agent Orange defoliant used in the Vietnam War, was the result of years of industrial pollution and that further fish testing would occur.

The NSW government will spend A$5.8 million buying back fishing licences and compensating some 40 fishermen, some of whom have seen generations of their families haul harbour fish and prawns to sell to seafood restaurants which dot the shoreline.

"I have been here for 45 years fishing on Sydney Harbour and I don't want the compensation, a lot of us don't, we want to continue fishing," fisherman Cameron Aiello told reporters.

Many of the fishermen are worried their families may have been contaminated after eating dioxin contaminated fish.

"A lot of the fishermen are concerned about their health and the health of their families - they have been feeding their kids seafood regularly all their lives," said fisherman Kippa Waters.

Commercial harbour fishing was banned for three months in January after upstream fish tests revealed industrial waste dioxin almost 100 times WHO levels. Fish caught near the harbour entrance recorded dioxin 10 times WHO levels.

Recreational anglers have been told to eat no more than 150g of Sydney Harbour fish a month.

"These fishers have been doing it tough since the bans on commercial fishing were introduced," said Macdonald in a statement announcing the buy out of commercial fishing licences.

"Through no fault of their own they have been caught up in a problem caused by 100 years of industrial pollution by multinational companies like Union Carbide."

Macdonald said A$200 million was being spent cleaning up 30 toxic sites in and around Sydney Harbour.

State government documents have shown that between 1949 and 1976 Homebush Bay, site of the Sydney 2000 Olympics, was used as a dumping ground for the deadly poison dioxin.

Carcinogenic dioxin was produced at a nearby Union Carbide chemical factory and waste was buried in landfills or scattered above ground in drums. The dioxin leeched into the waters of Homebush Bay on the Parramatta River which feeds Sydney Harbour.

Development of plans for the Sydney 2000 Olympics site initially included cleaning up Homebush Bay waters, but this was then shelved for fear of disturbing the dioxin in sediment.

Fishing in Homebush Bay has been banned for decades.

Macdonald said a $20 million clean-up of a site near the old Union Carbide plant at Homebush Bay would start this year.

"It will be the largest sediment remediation project undertaken in Australia," said Macdonald. "Obviously cleaning up this industrial hangover will take some time."

Sydney Harbour, whose foreshores cover more than 250 km (155 miles), incorporating 107 charted coves and bays, is renowned as one of the world's great harbours.

But the harbour is a working port and over the years it has been used as a marine dump. A few decades ago raw sewage, toxic waste and litter contaminated the harbour.

In recent years new environmental laws and offshore sewage outlets have cleaned up the harbour, which now regularly sees whales and dolphins swimming in its sheltered waters.

Macdonald said that if future harbour fish tests showed a drop in dioxin levels, limited commercial fishing may resume.

But the harbour's commercial fishermen are not optimistic.