“We are not taking this step lightly but it is necessary,” Chancellor Alexander Schallenberg said.
Unvaccinated people will only be able to leave home for a limited number of reasons, like working or buying food.
About 65% of Austria’s population is fully vaccinated, one of the lowest rates in western Europe.
Meanwhile the seven-day infection rate is more than 800 cases per 100,000 people, one of the highest in Europe.
Overall, Europe has again become the region most seriously-affected by the pandemic and several countries are introducing restrictions and warning of rising cases.
The unvaccinated were already barred from visiting restaurants, hairdressers and cinemas but will now be told to stay at home.
“In reality we have told one third of the population: you will not leave your apartment anymore apart from for certain reasons,” Mr Schallenberg said.
“That is a massive reduction in contacts between the vaccinated and the unvaccinated.”
The government says police will carry out spot checks in public spaces to determine their vaccination status.
The new measures – which do not apply to children under 12 or those who have recently recovered from Covid – will initially last for 10 days, Health Minister Wolfgang Mückstein said.
Some critics have questioned whether the move is constitutional. The far-right Freedom Party has said it will create a group of second-class citizens.
In neighbouring Germany, where Health Minister Jens Spahn has warned of a pandemic of the unvaccinated, the federal government and state leaders are due to meet next week to discus possible new restrictions.
Germany’s 67.3% vaccination rate is higher than in Austria, but not by much. Germany has designated Austria a high-risk area, meaning anyone arriving from there must go into quarantine.
And the Netherlands has imposed a “lockdown-lite” designed to limit social contacts in response to a sharp increase in infections.
Measures include early closing for restaurants and shops and barring spectators from sporting events.
About 84% of Dutch adults have been fully vaccinated. Most patients in Dutch hospitals have not had their jab.
Vaccination rates are significantly lower in some eastern European nations.
Latvia, where 59% of the population are fully vaccinated, re-imposed lockdown last month and has banned lawmakers who refuse the vaccine from voting on laws and taking part in debates until the middle of next year. They will also see their pay docked.
In Russia only about 35% of the population are fully vaccinated, according to Our World In Data. At the end of October, Moscow shut shops, restaurants and schools in a partial lockdown and workers were given nine days paid holiday to curb infections.
Many Russians remain suspicious of the Sputnik V vaccine, which is internationally recognised as an effective shield against Covid.
Some other countries are also introducing measures applying only to the unvaccinated. In Australia, the state of Queensland will bar unvaccinated people from restaurants, pubs and sports events from 17 December.
And Singapore has said that those who remain unvaccinated by choice will have to pay for their own medical bills from December.