The "continuous shipbuilding" proposal, which involves the replacement of frigates, patrol boats and submarines over two decades, is expected by the government to keep up to 2,500 jobs in the sector in what Prime Minister Tony Abbott said was "a very historic announcement."
"Previous Australian governments have announced that individual ships or classes of ships will be built here in Australia," Abbott said at a news conference Tuesday.
"What we are announcing today is basically a fleet build here in Australia, centered on [South Australia]."
Abbott would not give new details about the ongoing search for an international supplier to design and build the nation's next generation of submarines to replace its aging diesel and electric-powered Collins-class fleet, which are set to be retired beginning about 2026.
France, Germany and Japan are in the running for the contract, which has been touted as Australia's biggest-ever defense procurement with cost estimates of $50 billion.
But the bidding process has been a source of contention in Australia amid concerns the domestic shipbuilding industry could be fatally hurt if Canberra chooses to buy off-the-shelf submarines internationally.
"What we have asked the various potential partners to give us is a price for a domestic build, a hybrid build and offshore build," Abbott said.
"Based on what comes back to us in the coming months, we'll make a decision."
The shipbuilding package will bring forward the "Future Frigate" program to replace the current Anzac-class frigates to 2020. The construction of offshore patrol vessels to replace the Armidale class has also been moved forward to 2018.
The total cost was expected to reach about $40 billion, Abbott said.
Defence Minister Kevin Andrews said establishment of a "continuous shipbuild" domestically reflected the view that Australia's future naval capability "is at the centerpiece of our strategic concerns and will be at the centerpiece of the forthcoming white paper on defense".
The frigates would be the Navy's workhorses over the next few decades, Vice Adm. Tim Barrett added at the same press conference.
The shipbuilding announcement has been seen as an effort to assuage voters in South Australia, which has the highest unemployment rate among Australia's states at 8.2 percent and is home to most of the country's major shipbuilding infrastructure.
The Royal Australian Navy's Fleet Review 2009.