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Premier Gladys Berejiklian says restrictions are "effective immediately" for Greater Sydney, the Central Coast, Blue Mountains, Wollongong and Shellharbour.
The so-called Bondi cluster, which began last week, now stands at 31 after a Sydney airport limousine driver tested positive to the highly infectious Delta variant, which quickly started spreading at Bondi Junction's busy Westfield shopping centre.
"Please abandon non-essential activities, please don't attend social gatherings unless you absolutely must," the premier said on Wednesday.
"I am not going to rule out further action."
Residents who live or work in the City of Sydney, Waverley, Randwick, Canada Bay, Inner West, Bayside, and Woollahra local government areas cannot travel outside the metropolitan area unless it's absolutely essential.
"We don't want the virus to spread to the regions," Ms Berejiklian said.
NSW recorded 10 locally acquired cases to 8pm on Tuesday, seven of which were already announced.
An additional 13 cases were reported after 8pm, which will be counted in Thursday's official tally.
Overall, there have been 16 new cases taking the total number of infections to 31, from 21 on Tuesday.
Under the new restrictions, household visitors are limited to five people, including children and masks are now compulsory in non-residential indoor settings - including workplaces - and at outdoor events.
Masks must also be worn to gym classes, which limited to 20 people.
More than 44,000 tests were completed in the 24 hours to 8pm on Tuesday.
The spike in infections is a blow for the state and most school holiday plans are now in chaos.
Just two days before public schools break for two weeks, Queensland followed Victoria and New Zealand by imposing bans on travellers from much of Sydney.
From 1am Thursday, Queensland will close its border to people from the City of Sydney and the Woollahra, Bayside, Canada Bay, Inner West, and Randwick local government areas. Waverley was already on the list.
"To keep Queenslanders safe, we will be following exactly what Victoria has announced last night," Premier Annastacia Palaszczuk said.
"This advice may have to be updated during the course of the day or into the evening."
Other Australian states have imposed border restrictions for people from the hotspot areas, with Victoria on Tuesday declared seven Sydney local government areas "red zones".
Earlier on Wednesday, NSW Health issued a health alert after a person infected with the virus flew from Sydney to New Zealand and back.
The alert was for passengers travelling on Qantas flight QF163 on Friday night to Wellington, and anyone who flew on Monday morning on Air New Zealand flight NZ247 from Wellington to Sydney.
Passengers on board those flights must contact NSW Health immediately, get tested and isolate for 14 days regardless of the result.
Meanwhile, a childcare centre 60km southwest of Sydney's CBD, confirmed in a Facebook post it was closed for deep cleaning after a child who attended the centre on Monday tested positive for Covid-19 on Tuesday night.
"The girl and her family are doing well and resting at home," Little Zak's Academy in Narellan Vale posted on Wednesday.