A health check and initial administrative steps for new asylum seekers will still be carried out at the Traiskirchen centre in Lower Austria, but they will then be sent on to accommodation in Austria's other provinces.
Human rights group Amnesty International is due to inspect the camp on Thursday, and hurried efforts have been made to clear rubbish and improve hygiene facilities.
Last week the UN described conditions at the camp as “dangerous and inhumane”. The camp is designed to hold a maximum of 1,800 people but currently houses more than twice as many, around 4,000 refugees.
Nearly half of them do not have a bed and are sleeping in corridors, and under tarpaulins and tents outdoors. Many of the refugees sleeping outside are women and young children.
Austria, a country of 8.5 million people, received more than 28,000 asylum requests in 2014, three times the European average relative to population size.
It expects at least 75,000 asylum seekers to arrive by the end of this year, with a majority coming via Serbia and Hungary - the so-called ‘Balkan route'.
Interior Minister Johanna Mikl-Leitner said that currently around 1,600 beds are needed per week for new asylum seekers, and that the situation at Traiskirchen has become “unsustainable”.
She added that the provinces have made “a great effort in recent weeks to create new quarters for refugees fleeing from war, but that more refugees are arriving than we can accommodate in the short term”.
She said the government will be supporting the provinces as best as it can by opening up police quarters and cells and setting up new tent camps and containers. The Red Cross has said it can provide an additional 500 beds.
The entire European Union is struggling to cope with a huge influx of refugees, many risking their lives to flee violence in Syria, Iraq and Afghanistan.
Almost 185,000 applied for asylum in the first quarter alone - a rise of 86 percent according to EU statistics agency Eurostat.