The new development will see Blackwattle Bay transformed into a business hub, with 2000 more residents and 5770 more jobs projected for the area by 2041.

The government will also reclaim land used for Wentworth Park greyhound racing track and a nearby pop-up school to create parkland.

In total, Pyrmont is expected to host about 20,000 new jobs by 2041.

The 20-year plan is outlined in the the Pyrmont Peninsula Place Strategy, released on Friday. The government will also construct a new Western Sydney Metro station at Pyrmont.

Planning Minister Rob Stokes said the strategy provided clarity about Pyrmont's future and, as a requirement, created more open space and uninterrupted foreshore.

"Our fundamental task was to encourage economic development while enlivening the peninsula, boosting jobs and providing for more quality public open spaces for everyone to enjoy," Mr Stokes said.

Star will also be permitted to build a tower on its southern end to a maximum height of 140m, lower than previously proposed. Its 2019 plan to develop the 237m Ritz Carlton tower was rejected.

Blackwattle Bay - currently an industrial working harbour - will be redeveloped into an urban quarter with office buildings.

Height limits will be stretched to 156m, or almost 50 storeys, and the area will host residences, offices, retail outlets and entertainment spaces.

There will also be a new ferry wharf and a possible harbour pool at the bay, while the new Sydney Fish Market will open there in 2024.

The government says it wants Pyrmont to be home to innovation-heavy industries like tech, advertising and media, and will seek to enable people to get around on foot and by bike.

Urban farms and community gardens on rooftops will also be incentivised.

Jones Bay Wharf and Darling Island, meanwhile, will be linked to create an uninterrupted foreshore walk.

Building heights at the Harbourside Shopping Centre at Tumbalong Park will be capped at 170m.

Treasurer Dominic Perrottet says the area will be an important hub for economic growth.

"Pyrmont is the real gem of Sydney and for too long its potential has been overlooked and under-utilised," he said.

The Sydney Business Chamber also welcomed the changes, particularly the construction of a metro station.

"Today's announcement is estimated to unlock $1 billion in investment in the precinct, including a much-needed new six-star hotel that will bring a major boost to the hard-hit hospitality, accommodation and tourism sectors in Sydney," executive director Katherine O'Regan said.

Star said its proposed developments would potentially deliver two hotels and create around 2000 jobs while establishing new dining precincts to be enjoyed by both locals and visitors.

Australian Associated Press