The emergency services attended Dutch Place, St Clair, about 6: 40 pm yesterday, and found a man suffering from multiple stab wounds.
He died at the scene.
Witnesses told police that two men were involved in a discussion, before one of the men was stabbed and the man fled the scene.
The officers of Nepean of the Police in the Area Command established a crime scene which will be examined medically.
Just after 8: 30 pm, police arrested a 31-year-old man nearby.
He was taken to Penrith Police Station where he is expected to be interviewed.