The state government will give $200,000 to Shellharbour council for the fitout of the new library within the proposed Shellharbour City Hub.
Council general manager Michael Willis said the grant signified "the compelling need" for the centrally located, city-wide service.
The council plans to spend $14 million on the new 2000 square metre library, part of the $57 million City Hub project.
The proposed hub also features a museum, auditorium, council chambers and administration offices.
"This funding is a welcome commitment from the state government," Mr Willis said. "Co-locating this service with civic and social facilities will offer a dynamic, resource-rich central facility at the heart of future community and cultural life."
The proposed library includes mobile technology throughout, contour shelving to assist "intuitive way finding and discovery" and a designated children's area for play, reading and learning.
Plans also include multipurpose meeting rooms, community art and display areas, and digital media studios.
The Tongarra Museum, located at Albion Park, will be integrated into the library to provide access to the city's historical artefacts, documents, photos and family history research resources and services in the one building.
On Monday, the state librarian and chief executive of the State Library of NSW, Dr Alex Byrne, and a delegation from the Public Libraries Consultative Committee visited Warilla Library to announce the funding, which comes from a pool of funds administered by the Library Council of NSW.
The committee held its quarterly meeting in the Shellharbour council chambers where it was given an outline of the council's Libraries and Museums Strategy 2024.
Dr Byrne described the current Warilla facility as a "difficult building", but said council staff had done an impressive job providing services there.
As for the merits of centrally locating a library, that was a matter for councillors to decide, Dr Byrne said.
The $200,000 grant is dependent on the hub project going ahead. A construction contract is due to be awarded in October.
Meeting with the delegation was Cr Helen Stewart, who said the City Hub project was "the biggest decision" she would ever have to make.
"I am supportive of the new library and museum but still have reservations about the administration component," she said.
Cr Stewart endorsed Tuesday's extraordinary meeting, which has been called to discuss a confidential legal agreement between Shellharbour City Council and Stockland relating to a potential sale of Lamerton House.
"The more information we have the better," she said.
Under the council's Libraries and Museums Strategy 2024, the council will retain its branch libraries at Albion Park and Oak Flats and retain a presence at Warilla, however it is proposed to relocate the Shellharbour Village Library to The Waterfront, Shell Cove, by 2018 and co-locate it with other facilities.
The move has angered people in Shellharbour Village and was the subject of a rally led by Cr Kellie Marsh.
Cr Stewart said while the move may be part of a strategy, councillors would have the final say on the future of the Shellharbour Village library.