On Tuesday, level two restrictions were enacted in the capital of New South Wales (NSW), a state 99.9% in drought.
These could be increased to level three within months, local media report.
Temperatures are predicted to soar above 40C (104F) from Tuesday, worsening fires which have already killed six people since October.
There are now more than 100 fires in NSW and Queensland states, many of which have been burning for several weeks.
What are the water restrictions?
Under the new rules, people in Greater Sydney, Blue Mountains and Illawarra are not allowed to water their gardens between 10:00 and 16:00.
When they do water their gardens, they can only do so with a bucket or a watering can - hoses and sprinklers are banned.
Cars can only be washed with a bucket or at a commercial car wash, and swimming pools of any size cannot be filled unless the owner acquires a special permit.
The rules apply to everyone in these areas, and residents caught breaking the restrictions face fines of A$220 (£114, $150). Businesses will be fined A$550.
Under level three restrictions, people will only be able to water their gardens before 09:00 and after 18:00, and will be banned from taking showers longer than five minutes.
Officials plan to implement level three rules when Sydney's dam levels hit 30% - a critical low. This was originally predicted to happen in July, but could now be much earlier due to the worsening bushfires and drought.
Several rural towns have already run out of tap water and are relying on bottled supplies and trucked-in cartons. A number of inland centres have endured water restrictions for months.