Regional Victoria will also go into stage three restrictions from midnight on Wednesday.
The measures will not affect work, medical care or compassionate circumstances and could be in place for at least six weeks, however the premier did not confirm the exact length of the measures.
"If we don't make these changes, we're not going to get through this", Mr Andrews said.
In a news conference on Sunday, Victoria Premier Daniel Andrews also announced a curfew in the city of Melbourne and new movement restrictions for its residents.
Andrews said there was an "unacceptably high" number of community transmission cases, and the state had 760 active "mystery" COVID-19 infections where the source of the transmission was not known.
Under the new rules, residents of the state capital Melbourne will be subject to a night-time curfew. We've got to limit the amount of movement, therefore limiting the amount of transmission of this virus.
Andrews said hospital nurses had now worked more than 570 shifts in care homes.
Cafes and restaurants will only be able to offer takeaway.
"We need to see those numbers through the eyes of our healthcare workers and the kind of very bad fear that they have about what it means for people presenting to hospital", he said.
Childcare services will also be closed, with exemptions for vulnerable children and the children of essential workers.
Victoria Premier Daniel Andrews hasn't explained exactly what "stage four" will mean yet.
Meanwhile, a group of Victorian teachers and parents has written an open letter asking Professor Sutton to reconsider his health advice about schools continuing to remain open.
Federal Health Minister Greg Hunt said today "was one of the hardest days in Victoria's history" but said the new measures were "regrettably necessary".
Woolworths Supermarkets Managing Director Claire Peters said on Sunday the supermarket chain "understands this is an anxious time for Victorian customers".
"We must do more".
"We ask that our customers continue to adhere to our social distancing and hygiene measures while in store and continue to treat our team and each other with respect while shopping".
The last time a state of disaster was put in place in Victoria was during the devastating bushfires that ravaged the country at the beginning of 2020.
It comes amid calls from doctors for a "New Zealand-style full lockdown", as Covid-19 infections and deaths in Melbourne mount.
South Australia has recorded two new cases, one a young woman who attended a school while likely infectious.
The news comes after the state had multiple record-breaking days throughout the week, including 49 cases yesterday that authorities "simply can not trace".
Queensland confirmed one positive case on Sunday, a young consular staff member who was infectious on a domestic flight after returning from overseas.
Melbourne is already under a reimposed six-week stay-home order, but it has been struggling to rein in COVID-19.