The number of commercial international arrivals allowed into Australia will be temporarily halved to around 3,085 per week.
Prime Minister Scott Morrison made the announcement following a meeting of national cabinet on Friday.
He said the decision would reduce pressure on quarantine facilities and was made given the virulent nature of the Delta variant of COVID-19.
"While the reduction of those caps will certainly, right across the system, obviously take some pressure off, as we have observed over the course of these past 18 months, that alone does not provide any fail-safe regarding any potential breaches," he told reporters.
The cap is likely to remain in place until the start of next year.
"If medical advice suggests that we can alter that, then of course the national cabinet has always been receptive to that advice and we'll continue to monitor that," Mr Morrison said.
"We wouldn't want to keep those caps in place any longer than we had to."
More than 34,000 Australians remain stranded abroad.
Prime Minister Scott Morrison speaks to the media during a press conference. Source: AAP
Mr Morrison said the government would mitigate the impacts of the cap reduction by increasing repatriation flights - though he did not say by how much.
“We will be enhancing that, increasing that for major ports, to ensure we can keep the pace of bringing Australians home,” he said.
He said there is additional capacity at the Howard Springs facility in Darwin where repatriated Australians have been undergoing quarantine.
Queensland, Victoria, Western Australia and South Australia all pushed for the caps to be reduced on fears of further outbreaks and lockdowns, and with many quarantine hotels at capacity.
The prime minister said caps would be restored to previous levels once more Australians are vaccinated.
He indicated arrival caps would then be separated between those vaccinated and the unvaccinated.
Earlier, NSW Premier Gladys Berejiklian said she sympathised with the thousands of Australians stranded abroad who want to come home.
“Firstly, my heart goes out to thousands of Australians who have to wait longer to come home," she told reporters in Sydney.
She said she didn’t agree with her state counterparts pushing for the cap cut.
“I don't support the view that other premiers have that this means mistakes aren't going to happen and we're not going to have outbreaks. That is still going to occur,” Ms Berejiklian said.
"Bringing less people home doesn't mean you won't have outbreaks."
Mr Morrison said more than 80 per cent of international arrivals to Australia were returning citizens.
