Police say the body was found in the sand by a group of children at the southern end of South Beach at Maroubra about 10am on Sunday.
The age and sex of the baby is yet to be determined.
According to police, the child was found buried in 30cm of sand. The children who made the grisly discovery are receiving counselling.
Forensic officers are at the scene and police are urging anyone with information to contact them.
Police say a post mortem examination will be conducted to determine the cause of death.
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"The sex and age of the child is unable to be determined at this point due to decomposition of the body," Eastern Beaches Inspector Andrew Hollands said.
Inspector Andrew Hollands said the six-year-old and seven-year-old child is receiving counselling, with Maroubra Life Saving Club also offering counselling to their members involved in the rescue.
"Obviously everyone is upset, it's a tragic event. Something like this doesn't happen everyday and it will affect everyone in the surf club involved."
Holland said investigators were looking through birth and hospital records as well as consulting with the Missing Persons Unit to try and find the child's parents. He urged the baby's mother to come forward.
"Police have concerns about the mother involved, we're hoping she has sought medical assistance and that she feels confident enough to contact Eastern Beach detectives or Crimestoppers," Inspector Hollands said.
Randwick Mayor Ted Seng said South Maroubra was one of the area's more isolated beaches, but that it was patrolled by council lifeguards and volunteer surf life-savers.
"To say that I'm shocked is an understatement," Seng added in a statement. "I cannot imagine the circumstances that lead to this tragic event."
Last Sunday, a newborn baby was found crying at the bottom of a roadside drain in Sydney by passing cyclists, with police saying he had been in the 2.5-metre (8.2-feet) deep drain since Tuesday.
The baby's mother remains in custody after she was charged with attempted murder, with the case returning to court on December 12.
