"With the lack of rain, with the lowest inflows into Sydney's water storages since 1940, the government's come to the decision that it is best to come into water restrictions," Ms Pavey told reporters.
Under the restrictions, hoses must have a trigger nozzle or another attachment with an instant on-off mechanism and lawns and gardens are to be watered before 10am and after 4pm.
Rules will also apply to the hosing of hard surfaces, the washing of vehicles, boats and buildings, the use of sprinklers and watering systems and filling new or renovated pools.
However, there will be a three-month grace period before fines of $220 for individuals and $550 for businesses were imposed.
A range of exemptions will also be available to businesses in situations where water is critical to their operations, Sydney Water's Catherine Port said.
It's been almost 10 years since Sydney faced water restrictions with the last ones lifted in mid-2009.
Tuesday's announcement comes after Sydney's desalination plant was switched on in January, returning to operation for the first time in seven years.
Ms Pavey said the plant was working at about 50 per cent capacity and would add about 15 per cent to Sydney's water supply when it reached full operation.