Gatherings of more than two people are now banned, the only exceptions being with immediate household members and for work or education.
Playgrounds, skate parks and outdoor gyms are also closed.
Victorian premier Daniel Andrews said Victorians should only leave their homes for food and supplies, medical care, exercise, or work or education.
“Over the last two days we have seen the number of cases of coronavirus in Victoria increase by 136 to 821. Four people have already died, many more are in hospital or self-isolating at home,” he said.
“Most Victorians are doing the right thing and I’m grateful to them. But we continue to see instances of people gathering in significant numbers so we must do more.
“That’s why we are also restricting gatherings to no more than two people except for members of your immediate household and for work or education.
“We will not be breaking up household family dinners – but BBQs with the neighbours cannot happen anymore.”
Those found in breach of the directions face on-the-spot fines of $1,652 for individuals and $9,913 for businesses.
Larger fines can also be issued through the courts.
Also announced was a moratorium on evictions for the next six months for residential and commercial tenants who are experiencing financial distress due to the impact of coronavirus.
“As we deal with this health crisis, we know that for many Victorians it’s an economic crisis as well. With many businesses losing their customers, and Victorians losing their jobs, paying rent is becoming impossible for some people,” Mr Andrews said.
“The events we are living through are unprecedented and are going to mean big changes for everyone from our littlest Victorians to our most senior citizens.
“Life is going to look very different for a while but if we don’t make these changes now, the virus will continue to spread, and our health system will be overwhelmed.
“To flatten the curve, we are all going to have to sacrifice a lot. But it may be the most important thing we ever do.”
The Stage 3 restrictions will be reviewed after four weeks.