Anyone living in Lombardy and 14 other Central and Northern provinces will need special permission to travel. Milan and Venice are both affected.
Prime Minister Giuseppe Conte also yesterday announced the closure of schools, gyms, museums, nightclubs and other venues across the whole country.
The measures, the most radical taken outside China, will last until 3 April.
Italy has seen the largest number of coronavirus infections in Europe, with the number of confirmed cases jumping by more than 1,200 to 5,883 on Saturday.
The strict new quarantine measures affect a quarter of the Italian population and centre on the rich northern part of the country that powers its economy.
The death toll in Italy has passed 230, with officials reporting more than 36 deaths in 24 hours.
The health system is under immense strain in Lombardy, a northern region of 10 million people, where people are being treated in hospital corridors.
"We want to guarantee the health of our citizens. We understand that these measures will impose sacrifices, sometimes small and sometimes very big," Prime Minister Conte said as he announced the measures in the middle of the night.
Under the new measures, people are not supposed to be able to enter or leave Lombardy, where Milan is the main city.
The same restrictions apply to 14 provinces: Modena, Parma, Piacenza, Reggio Emilia, Rimini, Pesaro and Urbino, Alessandria, Asti, Novara, Verbano Cusio Ossola, Vercelli, Padua, Treviso and Venice.
"There will be no movement in or out of these areas, or within them, unless for proven, work-related reasons emergencies or health reasons," Mr Conte told reporters.
"We are facing an emergency, a national emergency. We have to limit the spread of the virus and prevent our hospitals from being overwhelmed."
However transport in and out of the regions affected continues. Flights continued to arrive at Milan's Malpensa and Linate airports on Sunday, though some scheduled flights were cancelled.
Chris Wood, a 26-year-old from London said he and his girlfriend had cut their holiday in Italy short and were waiting for a flight home from Venice.
"The initial announcement that Venice was in lockdown was quite terrifying but everything at the airport is pretty calm," he said. "I was in a bit of a panic as I thought we were going to be stuck in Venice for a month."
The World Health Organization (WHO) chief Tedros Adhanom Ghebreyesus praised Italy for making "genuine sacrifices" with the restrictions. Until now only around 50,000 people in northern Italy had been affected by quarantines.
Last week the government announced the closure of all schools and universities across the country for 10 days.
The number of infections worldwide is almost 102,000, the WHO says, with nearly 3,500 deaths. Most of the fatalities have been in China, where the virus originated in December.
But the country yesterday reported its lowest number of new infections in a single day since January - an indication that the virus's spread is slowing.
There were 40 new cases on Saturday, less than half the number reported on Friday. Twenty-seven new deaths were reported - the lowest figure in more than a month - and all were in Wuhan, where the outbreak began.
Iran, one of the worst hot-spots outside China, has now confirmed almost 6,000 infections and 145 deaths.