The scheme, announced three months ago, is now heading for the courts, where opponents are demanding that a secret deal between Mr Murdoch and the New South Wales Labor government be made public.
With a general election pending next year, the controversy has also focused on the relationship between Mr Murdoch and Paul Keating, the Prime Minister, who has given his blessing to the enterprise.
The public land at the centre of the storm is the Sydney Showground, a 27-hectare site in central Sydney which has been the home of the Royal Agricultural Society since 1882. For most of that time, the grounds have hosted the annual Royal Easter Show, at which farmers display the cream of their livestock and produce.
With the society planning to relocate the show on the site being developed for the 2000 Olympic Games, debate has raged over the future of the old showgrounds. They lie in the centre of parkland which Lachlan Macquarie, one of Australia's most visionary governors, dedicated in 1811 "for the benefit of all present and succeeding inhabitants of Sydney". In the 1990s, they also comprise some of Australia's most valuable real estate.
Film and television producers had lobbied the state government to convert some of the showground buildings for film production while turning the rest of the site into public parkland. After a meeting in Canberra with Mr Murdoch a year ago, Mr Keating took them by surprise when he announced that 20th Century Fox, the Hollywood studio owned by Mr Murdoch's News Corporation, would build a studio there itself.
Technically, it is not Mr Keating's land to give: it is administered by the New South Wales state government, headed by Bob Carr, a Labor ally of Mr Keating who was left to sort out the details with Fox. When the deal was formally announced in July, it emerged that Fox Studios Australia would receive not just a portion of the showgrounds but almost the entire site for a peppercorn rent for 50 years. Only the horse stables and two heritage buildings would remain for public use, leaving the rest to Mr Murdoch.
Fox says the studio will provide new opportunities for the Australian industry. But Australian-based film-makers remain sceptical. Lynda House, producer of Muriel's Wedding and Proof, said: "I'm not convinced that this means a new golden age for Australian film." Paul Cox, director of Man of Flowers, said: "I'm worried about American film-makers buggering up the Australian film industry as they did to the British industry in the 1960s and 70s."
Apart from plans to bulldoze the showgrounds' arena and grandstands, no details of the deal have been released. Yesterday the New South Wales opposition coalition passed a motion in the upper house, where the government is a minority, demanding that Mr Carr's administration release all papers associated with the deal.
Many Australian producers fear Mr Murdoch plans to use the studio to relocate American films away from Hollywood, where production costs have soared. An average feature film costs $3m (pounds 2m) to produce in Australia compared to $14m in Hollywood. Mr Murdoch hinted as much when he said recently: "Under the existing economics of film-making in Hollywood, there are too many films being made. We are not rushing into that area blindly."
As Mr Murdoch controls 70 per cent of Australia's newspapers, the deal has come under little press scrutiny. The rival Sydney Morning Herald, controlled by Conrad Black, has criticised it, describing Mr Murdoch as "a 20th-century fox" and attacking the manner in which the state government suspended normal planning controls to rush through the scheme.
So, too, has Clover Moore, an Independent MP who represents the showground district in the state parliament. She has referred the deal to the Independent Commission Against Corruption, a state body charged with investigating government actions and dealings. "The government doesn't want us to know about their deal with Mr Murdoch until it is all signed and sealed," she said. "There has been no debate, half our media has been silenced and there is fear of speaking out against the intentions of a powerful media magnate."
Mr Keating appeared to demonstrate her point two weeks ago when Mr Murdoch rattled his government by describing the Australian economy as "a disgrace". Mr Keating was uncharacteristically benign in his response. "I think a few reactionaries were whispering in his ears," he said.