Police say a dead man who was found with stab wounds at a home in Bridgewater in the state's south was from St Marys.
The 49-year-old man suffered a number of knife wounds and was pronounced dead at the scene and police say they are treating his death as a suspected murder.
A 34-year-old Bridgewater man was taken to hospital and treated for unspecified injuries. He was arrested and remains in police custody.
A third man, aged 39, suffered minor injuries.
No one has been charged in connection to the incident.
Police say they were called to the Wallace Street residence at 12.55am this morning.
Detective Acting Inspector Michael Smith said when they arrived, the deceased man was in the house and the 34-year-old man was in the yard.
"They were known to each other," he said.
"Investigators are conducting a forensic examination of the scene and continuing to work to piece together exactly what took place."