Anthony Albanese used a major speech on Wednesday to announce plans to make it a legal requirement for AI data centre operators to underwrite new energy generation.
He will also oversee the creation of an AI office within his department.
Speaking at Sydney University, Mr Albanese said the nation could make AI stand for "Australia's Interests" in a shift away from his government's previous light-touch approach to regulation.
He promised to take a leading role in the AI rollout after months of pressure from both the tech industry and those worried about the rapid shifts in the global economy.
Tech Policy Design Institute executive director Johanna Weaver said the announcement needed to be "fast followed with hard decisions" on issues such as copyright, workforce transition and environmental impacts.
"The choices we make as a nation in the next year will determine if AI shapes us or we shape it," she said.
"Australia needs co-ordinated, ambitious and decisive leadership on AI."
The prime minister vowed to pass legislation on mandatory standards for AI by early 2027 after a national cabinet process with state and territory leaders, although he provided few details about the proposals.
Getting the framework right would enable faster approvals and make Australia a more attractive destination for international investors, Mr Albanese said.
"It is not our goal to try and legislate for every possible eventuality or risk," he said.
"That only creates the risk of Australia missing out on investment altogether."
But green groups accused Labor of "kicking the can down the road", calling for a moratorium on data centre approvals until binding rules around energy and water use were in place.
"The prime minister is rolling out the red carpet for these water-guzzling energy vampires, with no plans to regulate them until at least 2027 - that is a betrayal of Australian communities and our national interest," Greenpeace Australia's Joe Rafalowicz said.
Expectations for large AI data centres, released by the government in March, would be strengthened with legislation requiring developers to underwrite power supply for the energy-hungry facilities.
It would ensure that no costs were passed onto households or businesses and at least as much energy was put back into the grid as was taken out.
Digital Rights Watch chair Lizzie O'Shea said any deals done with big tech companies or relating to data centres should not be behind closed doors.
"We need sustainable, discerning take-up of frontier technologies," she said.
"There is a real opportunity for the government to consult openly with communities and work collaboratively to ensure we have the right infrastructure for the 21st century."
Australia could not turn back the clock nor press pause on AI, rather the nation should be "embracing change and shaping it", Mr Albanese said.
"Not just adopting or accommodating AI; designing it, making it, building the capability right here, and building our sovereignty and our economic resilience as a result," he said.
AI giant Anthropic, which has lobbied the government to provide clarity on copyright laws in exchange for a $21.6 billion investment in Australia, said  societal-level solutions were needed for the technology.
"We respect the process articulated by the prime minister today for establishing Australia's AI framework and take seriously Anthropic's responsibility to meet the terms set out by the Australian government for AI developers," a company spokesman said.
But Mr Albanese pushed back on calls to water down copyright laws to benefit AI firms.
"No company should use Australian books, music, art, or news to build or train AI without the artist's control, and that includes the artist's control of the price and value of their work," he said.
Opposition Leader Angus Taylor said the plan to create an AI office would just create more bureaucracy and the nation needed to ensure it had access to the best AI for cyber defence.
