The number of international trade arrivals allowed into Australia will be temporarily halved to around 3,185 per week.
Prime Minister Scott Morrison made the announcement after a national cabinet meeting on Friday.
He said the decision will reduce pressure on quarantine facilities and is made due to the virulent nature of the Delta variant of COVID-19.
“While the reduction of those limits will certainly, all through the system, obviously put a little bit of pressure, as we have observed over these past 18 months, that alone does not provide errors on any possible breaches,” he told reporters.
The cap is likely to remain until the beginning of next year.
“If medical advice suggests we can change that, of course the national cabinet has always been receptive to that advice and we will continue to monitor that,” Mr Morrison said.
“We wouldn’t want to keep those caps longer than we needed to.”
More than 34,000 Australians remain stranded abroad.
Mr Morrison said the government would mitigate the effects of the austerity reduction by increasing repatriation flights – although he did not say how much.
“We will improve that by increasing that for major ports, to make sure we can keep up the pace of bringing Australians home,” he said.
He said there is additional capacity at the Howard Springs facility in Darwin, where repatriated Australians were quarantined.
Queensland, Victoria, Western Australia and South Australia have all been working to reduce the caps for fear of further outbreaks and blockades, and with many quarantined hotels.
The prime minister has said caps will be restored to previous levels after other Australians are vaccinated.
He indicated that incoming caps will then be split between those vaccinated and those vaccinated.
Earlier, NSW Prime Minister Gladys Berejiklian said she sympathizes with the thousands of Australians who remain abroad who want to come home.
“First, my heart goes out to thousands of Australians who have to wait longer to come home,” she told reporters in Sydney.
She said she disagrees that her state colleagues are pushing to limit the cap.
“I do not support the view that other prime ministers think this means that mistakes will not happen and we will not show up. That will still happen,” Ms Berejiklian said.
“Getting fewer people home doesn’t mean you won’t have explosions.”
Mr Morrison said more than 80 per cent of international arrivals to Australia were returned by citizens.