A collection of paintings by Australian artist Sidney Nolan will be permanently housed in the Canberra Museum and Gallery (CMAG).

The ACT Government temporarily moved the 24 paintings from Lanyon Homestead to the Canberra Museum and Gallery in 2007 because of humidity concerns.

Nolan donated the Foundation Collection to the people of Australia in 1974. The Commonwealth still owns the collection and the ACT is responsible for looking after it.

Federal Home Affairs Minister Brendan O'Connor has now announced the valuable artworks will be housed in a dedicated gallery at CMAG.

But the painter's widow, Lady Mary Nolan, has said she will take back several works she has lent to the collection if it is not returned to Lanyon Homestead.

ACT Liberals MLA Vicki Dunne says that means several important Nolan works will probably be lost overseas.

"Which will be a great loss for Australia," she said.

But Chief Minister Jon Stanhope says it is the right decision and he hopes Lady Nolan changes her mind.

He says Lanyon Homestead is not a suitable home for the paintings.

"Works of this value weren't being protected to the extent they should have in terms of the environmental needs of significant works of art and our capacity to provide physical security in an isolated rural settings," he said.

"And added to that, genuine issues around their accessibility and the numbers of people that were making their way to Lanyon to see and to view this superb collection."

Mr Stanhope says the Government has set aside funding to create a dedicated gallery for the collection at the CMAG.