The South Australian Correctional Services Department is negotiating with rioting inmates at the prison, 300 kilometres north of Adelaide.
The Department says about 40 inmates damaged furniture and other items in a high security section of the prison, causing staff to lock-down the area.
Heavily armed police and emergency services have been at the scene for several hours.
Up to 10 inmates have been seen camped on the roof of the jail.
The group is dressed in black and wearing black balaclavas have been waving banners on the roof.
The latest banner sprawled in big black letters on a large white sheet says "Assault prisoners hey? No more".
Lange Powell from the State Corrections Department says the police and specialist staff are trying to negotiate with the prisoners.
Several MFS fire trucks have left the scene, but ambulance, CFS and police continue to watch on.
The jail has a high percentage of Aboriginal prisoners.
The chief executive of the South Australian Aboriginal Legal Rights Movement Neil Gillespie - who is in London - says he cannot comment on specific aspects of the latest incident.
But he says conditions in such jails are ripe for unrest.
"There has been an issue with overcrowding for quite some time," he said.
"It is very sad both for the prisoners and prisoners families and I'm uncertain of the background to this latest riot but it certainly doesn't surprise me." Prison riot negotiations continue
Negotiations are continuing with 38 prisoners involved in a stand-off at the Port Augusta jail in South Australia's north.
Two prisoners have since given themselves up.
The Corrections Department says the prisoners have damaged property, and yelling, clapping, and banging can be heard coming from inside the jail.
Police are set up outside the prison and the National Highway One running past the prison has been partly blocked off to traffic.
The State Opposition's correctional services spokesman, Stephen Wade, says the jail system is overcrowded, and the damage caused by the riot will lead to more problems.
"Those prisoners will need to be relocated while their facility is repaired, that is going to put incredible stress on a prison system that's already overcrowded," he said.
"After all it's not just Port Augusta that's overcrowded, every prison in our system has been racked, stacked and packed by this Government."
The Public Service Association (PSA) says it has been warning the Government for sometime that trouble was likely at the prison because of constant overcrowding and doubling-up in cells.
The PSA represents about 120 workers at the prison, including the correctional service officers who manage about 300 prisoners.
The Association's Peter Christopher says the trouble started yesterday when prisoners in the high security Bluebush unit were not allowed to go outside for exercise because there was not enough staff to supervise them.
"When prisoners in that unit weren't able to go outside and do their exercise, the reports we've received indicate that this was a trigger for this particular incident," he said.
The Correctional Services Minister, Carmel Zollo, says a full investigation will be carried out as a matter of priority.
"What I can say is that incidents like this are regrettable and are a concern, and clearly I want to know what has happened and what has triggered this incident," she said.
"It has been reported that this incident was a result of prison overcrowding, this is of course pure speculation, it is an isolated incident and I expect a comprehensive investigation into the underlying reasons and causes."
Ms Zollo says prison management has the right to shut down certain areas at any time.
She says a number of staff called in sick, and a decision had to be made whether to allow the prisoners to exercise.
"They got to always make a decision in the best interest of the running of that prison, for safety reasons, they'll always reserve the right to actually make some areas no-go areas," she said.