Staff and patients at St Joseph's Hospital in Auburn were told on Tuesday and Wednesday the ageing facility needed substantial renovations but funding requests had been rejected over the past decade.
It came after the board of operators for St Vincent's Health Sydney in recent weeks decided to shutter the hospital in September. The health department was notified last week.
The operator's interim chief executive told staff in an email the decision was extremely difficult.
"While St Joseph's Hospital has a proud history of public service provision to our community, the viability and sustainability of the campus has been under threat for many years due to its ageing infrastructure," Anna McFadgen said in the email.
"Despite our best efforts over the past 10 years, we have not been able to secure the necessary investment to address the deteriorating infrastructure."
Most services will be absorbed by other facilities in the Western Sydney Local Health District, which includes Auburn and Westmead hospitals, or moved to St Vincent's Sydney in Darlinghurst.
It's thought a residential unit for people with Huntington's disease will remain onsite under new operators.
Most staff would be offered jobs across St Vincent's and the broader NSW Health system. A small number will be made redundant.
"I acknowledge this is a major decision that we have not made lightly and we recognise this has significant implications for our St Joseph's Hospital," Ms McFadgen said.
The 39-bed subacute hospital provides palliative care, rehabilitation and geriatric psychiatry services, catering for both in-patients and out-patients.
Ground was first broken in 1886 as the Sisters of Charity expanded services to western Sydney and the facility has been rebuilt and expanded several times over decades.
Ms McFadgen stressed there would be no loss of health services to the public.
Transfers to Darlinghurst would allow for several services to expand to cater for people statewide including for mental health, rehabilitation, palliative care and heart-lung transplants.
While mid-September was the closure date, no service or bed at St Joseph's would be closed until a suitable replacement elsewhere had been opened, St Vincent's Health said.
"We've come to staff as soon as we could," St Vincent's Health Network Sydney spokesman David Faktor told AAP.
"None of us underestimate that it's a big surprise or underestimate the dedication the staff have given over years or, in some cases, decades."
The Health Services Union said it found out about the closure when staff were told this week.
Its main priority was ensuring staff were offered equitable jobs nearby, without a loss of conditions or pay.
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