The New South Wales government said the greater Sydney region water catchments were experiencing some of the lowest flows since the 1940s, and that the restrictions would be enforced from next week.
Sydney was last placed under water restrictions in 2003, with the limitations only eased in 2009.
But the move is seen as a response to the ongoing drought.
NSW Minister for Water, Property and Housing Melinda Pavey tells Ben Fordham they have activated the restrictions a month early.
Introducing water restrictions at this time means the State Government has made a decision to go earlier than expected.
"It is going to rain again".
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"Regional NSW has been experiencing a record drought".
The restrictions include requirements hoses have a trigger nozzle, lawns and gardens are not watered between 10am and 4pm and hoses are not left unattended unless topping up a pool.
Water levels in the dam had fallen by 0.5 percent in the last week, WaterNSW's website said.
Sydney is not supposed to face formal restrictions until Warragamba Dam drops to 50 per cent capacity. This means restrictions would have been enforced in about two months had the government not chose to act early.
A range of exemptions will also be available to businesses in situations where water is critical to their operations.
Anyone caught breaking the rules can be fined up to $220 (£120), while non-exempted businesses doing so could face financial penalties of up to $550 (£300).