Operations at the mine, off the Kimberley coast, were suspended last week after a seawall slumped, flooding the main pit.
The company stood down more than 200 workers last week but has now confirmed most of its 360-member workforce will be made redundant.
It will cost the company $11 million.
Mount Gibson chief executive Jim Beyer said it was a difficult decision to make.
"The action we have taken today is a prudent step to allow Mount Gibson to complete a proper evaluation of the options for Koolan Island, whilst preserving value in challenging circumstances," he said.
"Nonetheless, this decision has been especially difficult given the significant impact it will have on our people."
Iron ore price plunge shrinks margins
It comes as iron ore prices hover around five-year lows of about $US70 a tonne, shrinking the profits of miners and squeezing their margins.
The iron ore price has slumped almost 50 per cent this year on the back of weaker demand from China and an oversupply in the market.
Australia's big miners have been accused of flooding the market in a bid to knock out higher cost Chinese producers, which erodes the bottom line of smaller miners.
The company said the current price of iron ore and uncertain outlook for the commodity will weigh on its decision to recommence mining at the project.
It said it would continue to assess the costs involved with repairing the damage and expected to make an announcement on the project's future in the first half of next year.
Job cut pain felt across industry
The announcement follows similar moves by other miners.
Atlas Iron yesterday announced it would lay off 80 workers as it struggles to stay afloat amid low iron ore prices.
The company's directors also took a pay cut of 15 per cent while reducing its board from nine to six members.
Fortescue Metals Group (FMG), the smaller of the country's big three miners, has also made cuts.
The company last week announced it would cut capital spending by $US650 million this year and also axed three senior executive positions.
FMG development director Peter Meurs also announced he would stand down from his executive role at the company for two months.
An FMG spokesman said the decision was not a reaction to the market conditions but a normal evolution of the business.
"We made the decision to restructure the senior levels of the organisation in a way that will allow us to be even more flexible and adaptive moving forward," he said.
"Reshaping our leadership group will make our business more responsive and innovative, ensuring all areas of Fortescue are as efficient and productive as possible."
Source: http://www.abc.net.au/