The 31-year-old suspect, Justin Laurens Stein, was arrested in the Surry Hills suburb of Sydney and taken to the local police station.

During a court appearance on Wednesday, his lawyer listed a long history of mental health problems, Australian Associated Press reported.

He has been refused bail, New South Wales Police said.

The girl went missing from the village of Mount Wilson in the Blue Mountains, northwest of Sydney, on Friday.

Following a five-day search involving homicide detectives, dog units and police divers, the "body of a child was located in a barrel", police said.

Forensics officers are examining the scene close to the Colo River.

While the body is yet to be formally identified, New South Wales Police Commissioner Karen Webb said the barrel "contains human remains that are consistent with the missing nine-year-old".

Police told reporters that Stein became the focus of their investigation because of "inconsistencies" in his story and that "special behaviour" had caught officers' attention.

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Deputy Commissioner David Hudson said police will remain "uncertain of what exactly happened" to the girl until a post-mortem examination has taken place.

But he added: "What we are sure of is that the accused that we charged with murder was responsible for firstly placing her in the barrel and then disposing of that barrel in the bushland where she was located."

Mr Hudson said he hoped to provide the child's family with "some comfort" by establishing cause of death, the "purpose of her death", and to "identify exactly what happened".

Police Minister Paul Toole described the case as "horrible", "horrific" and "shocking", while the country's prime minister, Scott Morrison, said it was "just devastating".