Around a quarter of a million people in Sydney's northern beaches were ordered on Saturday to stay at home until Wednesday midnight, after a cluster of Covid-19 cases grew by 13.
More citywide restrictions may also be introduced to Syndey's 5 million residents in the next few days.
The outbreak in the Northern Beaches Council areas has reached 39 confirmed cases, and another two are under investigation, New South Wales Premier Gladys Berejiklian said.
"I should say, to put everybody on notice, we will be considering... whether this time tomorrow we do revert back to some restrictions in greater Sydney."
She added that any further restrictions were not expected to be as tough as for the northern beaches.
Residents there were asked to stay home unless for one of four essential reasons: grocery shopping, work, compassionate grounds including emergency medical treatment, or visiting an isolated relative.
Berejiklian said the strict lockdown was essential.
"We're hoping that will give us sufficient time to get on top of the virus, so that we can then ease up for Christmas and the New Year," she said.
Until this week, Australia had gone more than two weeks without any local transmission, allowing most states and territories to remove nearly all social distancing curbs.
But the Sydney northern beaches outbreak threw Christmas travel plans for thousands of Australians into chaos, with states and territories imposing border restrictions on Friday.
-Reuters