The outbreak will cost the industry millions of dollarsEight Australian racehorses have tested positive for equine influenza, forcing the suspension of Sydney's spring carnival racing.
The horses are based at Randwick racecourse in Sydney, the headquarters of racing in New South Wales.
The racecourse will be quarantined for 30 days to try to contain the outbreak.
The flu was first detected in recreational horses in Sydney last week, forcing a ban on horse movements and the cancellation of race meetings.
The primary industries minister for New South Wales, Ian Macdonald, said the flu could spread quickly through the Randwick stables, where some 700 thoroughbreds are based.
Some of Australia's finest thoroughbreds are stabled at Randwick and it is also home to some of the country's leading trainers.
The flu was found in eight of 10 horses from the stable of Randwick trainer Anthony Cummings.
'Grim day'
The outbreak is devastating blow to the racing industry, reports the BBC's Nick Bryant in Sydney.
The suspension of racing will cost millions of dollars, not just to the horse industry but to the bookmakers. There are fears of major job losses.

Jobs at the Randwick racecourse are threatened"It is more than a disaster, it is a grim, black day," Racing New South Wales Chief Executive Peter V'Landys told reporters.
He said the cancellation of Sydney races would have a significant impact on the Melbourne spring carnival, including the Melbourne Cup, Australia's most prestigious horse race which takes place in November.
"The cream of the horses are based at Randwick and Warwick Farm (in Sydney). You have leading trainers at Randwick. None of those horses now will be able to compete in Melbourne," he said.
Meanwhile, about 100 people, 30 of them children, remained quarantined following an outbreak in Warwick, Queensland state. Equine flu does not affect humans, but can be carried on clothing or footwear.