The move prohibits unvaccinated people 12 and older from leaving their homes except for basic activities such as working, grocery shopping, going for a walk - or getting vaccinated.
Authorities are concerned about rising infections and deaths and that soon hospital staff will no longer be able to handle the growing influx of COVID-19 patients.
"It's our job as the government of Austria to protect the people," Chancellor Alexander Schallenberg told reporters in Vienna on Sunday. "Therefore we decided that starting Monday ... there will be a lockdown for the unvaccinated."
The lockdown affects about 2 million people in the Alpine country of 8.9 million, the APA news agency reported. It doesn't apply to children under 12 because they cannot yet officially get vaccinated.
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The lockdown will initially last for 10 days and police will go on patrol to check people outside to make sure they are vaccinated, Schallenberg said, adding that additional forces will be assigned to the patrols.
Unvaccinated people can be fined up to 1,450 euros ($1,660) if they violate the lockdown.
Austria has one of the lowest vaccination rates in Western Europe: only around 65% of the total population is fully vaccinated. In recent weeks, Austria has faced a worrying rise in infections. Authorities reported 11,552 new cases on Sunday; a week ago there were 8,554 new daily infections.
Deaths have also been increasing in recent weeks. On Sunday, 17 new deaths were reported. Overall, Austria's pandemic death toll stands at 11,706, APA reported.
The seven-day infection rate stands at 775.5 new cases per 100,000 inhabitants. In comparison, the rate is at 289 in neighboring Germany, which has already also sounded the alarm over the rising numbers.
Schallenberg pointed out that while the seven-day infection rate for vaccinated people has been falling in recent days, the rate is rising quickly for the unvaccinated.
"The rate for the unvaccinated is at over 1,700, while for the vaccinated it is at 383," the chancellor said.
Schallenberg also called on people who have been vaccinated to get their booster shot, saying that otherwise "we will never get out of this vicious circle."