NSW Premier Gladys Berejiklian banned dancing and singing at night clubs while restricting numbers at gym classes, weddings, funerals and places of worship.
However, the five-day Cricket test match between Australia and India, scheduled to begin on Thursday, will go ahead with attendance at 50% capacity.
"We consider health and safety first and foremost, but we also need to think about well-being and jobs and the economy," Berejiklian told reporters in Sydney.
"And that's why by putting these measures and settings in place we are confident we can continue to increase and encourage economic activity, give confidence to business and jobs, but also, of course, keep the virus at bay."
NSW, which has close to 200 active COVID-19 cases, will levy a A$200 (NZ$215) fine for not wearing a mask with the rule being enforced from Monday.
Victoria, which now has 29 active cases, this week made masks mandatory across the state while limiting gatherings and shutting its border to NSW, prompting lengthy delays at border checkpoints on New Year's Day.
Authorities on Saturday said genomic sequencing showed the Victoria outbreak was directly linked to the NSW cluster, vindicating the decision to shut borders.
"As a result of the learnings that we have gone through, we’ve taken the view that the responses we have put in place are proportionate and fair. Victorians have a lot at stake here," Victorian health minister Martin Foley said.
South Australia state recorded another day of zero cases while Tasmania, which is COVID free, banned visitors from parts of Victoria. Queenslanders were urged to reassess travel plans to NSW and Victoria.
Australia has reported more than 28,450 COVID-19 cases and 909 deaths since the pandemic began.
