Australia’s largest city has been under stay-at-home orders since late June due to an outbreak of the Delta variant.
More than 2,500 people have been infected in Sydney’s worst outbreak this year.
New South Wales – of which Sydney is the capital – reported 177 new cases on Wednesday, the most in a day since March 2020.
Premier Gladys Berejiklian said it was not possible for the city to exit lockdown on Friday as had been planned.
She announced further curbs on movement – including a 10km (6.5 miles) limit on essential shopping.
Victoria and South Australia both came out of lockdowns on Wednesday, after containing smaller outbreaks.
Sydney’s five million residents had enjoyed a fairly normal lifestyle this year until the outbreak happened.
For most of the pandemic, Australia has kept infections relatively low by closing its borders and ordering hotel quarantine for arrivals.
State governments have plunged cities into rapid lockdowns to curb outbreaks, using aggressive contact tracing.
There have been over a dozen snap lockdowns in the past year.
But experts warn that restrictions in Sydney could last until September or even later.
Authorities say they cannot re-open until the transmission rate is back to near zero.
At least one in three cases from the past week had been infectious in the community. Reasons included undertaking critical work and grocery shopping.
The highly policed lockdown has fuelled discontent among some in the community.
Several thousand people staged “freedom” protests in Sydney, Melbourne and other cities on the weekend.
Local officials in Nanjing said that seven of those infected were in critical condition.
The new spike in cases has led some on Chinese social media to speculate about whether the Chinese vaccines were working against the Delta variant.
It is unclear if those infected were vaccinated.
A number of South East Asian countries relying on Chinese vaccines have recently announced they will use other jabs.
China has so far managed to keep the virus largely under control by closing borders and moving quickly to stamp out local outbreaks.