NSW Families and Communities Minister Kate Washington said the children, aged 12 and 14, were put in danger by being allocated to the home where 78-year-old convicted killer Regina Kaye Arthurell resided.
"It's entirely unacceptable for a vulnerable child in the care of the state to be living with a triple murderer," she told Sydney radio 2GB on Wednesday.
"It should never have happened and I'm deeply apologetic."
Her department was first made aware of the unusual living situation in December but "some very poor decisions" taken at the time didn't rectify their placement.
She confirmed that the murderer, formerly known as Reginald Kenneth Arthurell, was no longer living in the same residence as the children and had relocated.
The radio station revealed the disturbing allegations on Monday and were pounced upon by coalition MP Damien Tudehope in his grilling of Attorney-General Michael Daley during a budget estimates hearing on Wednesday.
An extended supervision order slapped on Arthurell which lapsed in December 2024 needed to be on Mr Daley's radar, Mr Tudehope said.
"You took no action to seek an extended supervision order and the circumstances of this person... now living with a woman who is significantly at risk and her foster children," he said to Mr Daley in a testy exchange.
"No one in the government took any any steps in relation to it. Do you think that's acceptable in protecting community safety?"
The convicted killer was released on parole in November 2020 after serving a 24-year sentence.
Arthurell first killed in 1974, having committed the manslaughter of her stepfather Thomas Thornton who was said to have been very abusive.
In 1981, she committed the manslaughter of naval officer Ross Browning in a Northern Territory robbery.
A few years after being released, she murdered her former partner Venet Mulhallby, bludgeoning her to death in 1995 with a piece of wood at her Coonabarabran home in central NSW.
Alcohol was implicated in all of the killings, which were committed under her birth name Reginald Kenneth Arthurell before she came out as transgender in 2021.
The woman was charged with several counts of sexual touching without consent of a man in 2022.
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