Prime Minister Julia Gillard said the jump of 40% was the biggest increase in three decades.
The move was one of 22 proposals put forward by an independent panel on asylum earlier this month.
Since then lawmakers have approved the re-opening of offshore processing camps for asylum seekers in Nauru and PNG.
The panel's review was commissioned by Prime Minister Julia Gillard, amid government deadlock on the issue and in the face of rising numbers of asylum-seekers arriving in Australia by boat.
Ms Gillard said the move to increase Australia's humanitarian intake was meant to send clear signals to asylum seekers.
''Message number one, if you get on a boat, you are at risk of being transferred to Nauru or PNG. But message number two, if you stay where you are then there are more resettlement places available in Australia," she said.
The increase was "targeted to those in most need: those vulnerable people offshore, not those getting on boats'', she said.
''People who arrive by boat will get no advantage. It's not worth the risk to life and it's not worth the money, because there is absolutely no benefit to getting on that people-smuggler's boat.''
As an indication of the government's commitment to ''safe alternatives to dangerous boat journeys'', Australia will proceed to immediately resettle an additional 400 refugees from Indonesia, she added.
The Australian government will also consult the UNHCR over the allocation of the remaining resettlement places.
More Afghans, as well as Syrians and Iraqis who had fled to refugee camps in Jordan, Turkey, and Lebanon, would be accepted as part of the increased intake, said Immigration Minister Chris Bowen.
"Of course Sri Lankan refugees will continue to figure in our program, as will Burmese in Malaysia, Thailand and India,'' he told reporters.
Ms Gillard has said she hopes that the offshore processing centres could be re-opened within a month.
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