Some 6324 new infections were diagnosed from more than 97,000 tests on Sunday, with the state also reporting another three deaths.
Among them was a man in his 80s who became the state's first Omicron death, NSW Health says.
The man acquired his infection at the Uniting Lilian Wells aged care facility in North Parramatta. He was fully vaccinated but had underlying health conditions.
Another man in his 80s and a woman in her 90s also died.
While new cases dropped by 70, the number of people hospitalised has doubled in the past week.
A total of 520 people are in hospital, 55 of them in intensive care and 17 ventilated.
Testing numbers also decreased by more than 12,000 compared to the day before.
The number of tests processed each day has plummeted by more than 60,000 over the past four days, as testing sites and laboratories become overwhelmed and wait times blow out.
Adding to the state's coronavirus concerns are hundreds of people receiving falsely negative test results on Christmas Day.
More than 400 people who initially received a negative result on Christmas Day were then notified they had tested positive on Boxing Day.
St Vincent's Hospital in Sydney revealed on Sunday a mistake had led to its pathology department incorrectly telling people they had tested negative on Christmas night.
The incorrect results related to people who had been tested on December 22 and 23.
The mistake, attributed to human error, is being investigated as concerns remain about those who took the initial negative result as reassurance to attend events over Christmas.
NSW Health Minister Brad Hazzard has revealed the government is considering lifting isolation requirement for health workers exposed to COVID-19 to stem looming staffing shortages.
"I'm certainly in deep conversation over probably the last week... about whether or not it's viable to have staff coming back sooner," he told reporters on Sunday.
They would wear fitted P95 masks and full PPE, Mr Hazzard said.
"If you're erring on the side of caution, it would certainly be an area that you could say probably this would be a safer option than having no staff."
Mr Hazzard also warned everyone in Australia was likely to be infected with the Omicron variant at some stage.
It's highly likely everyone will spend 10 days in isolation in the next two or three years, he said, but noted symptoms appear milder and the current approach to isolation may change.
His comments drew criticism from NSW Labor health spokesman Ryan Park.
"Where's the planning and where's the resources and where's the leadership?" Mr Park said.
More than four in five residents aged between 12 and 15 are fully vaccinated. This increases to 93.5 per cent for people aged 16 and over.
