Nine public housing towers have been put into complete lockdown after a surge in cases, with about 3,000 people ordered to stay home under police guard with officers controlling access points to the estates.
Some 30 other suburbs in the region have been put under extra social distancing restriction and can only leave their homes to work, attend school or to buy groceries.
Victoria’s Chief Health Officer Brett Sutton said the communal nature of the facilities, which house people on low incomes, has “genuinely explosive potential for the spread of the virus”.
It comes as Victoria state recorded 74 new Covid-19 cases on Sunday and 108 on Saturday.
The premier of Australia’s second-most populous state defended his order on Sunday and said the decision was “not about punishment but protection”.
Daniel Andrews told a press conference: “This is not going to be a pleasant experience for those residents, but I have a message for those residents: this is not about punishment but protection.”
Promising two weeks of free rent and hardship payments to the residents, Mr Andrews added that public health workers would test every resident of the buildings, except those who have previously tested positive.
Overall, Australia has weathered the coronavirus pandemic better than most other nations, with just over 8,400 cases and 104 deaths so far.
But the recent spike in Victoria is being closely watched by the rest of the country, which has moved to ease restrictions.