“We can't take in all asylum seekers in Austria,” Chancellor Werner Faymann said on Wednesday after a national asylum summit in Vienna.
The government plans to limit the total amount of claims to “about 130,000” over the next four years, on top of those filed in 2015.
“We have fixed this number as a guideline… We will study what happens when this limit is reached,” Faymann noted.
The four-year cap, which represents 1.5 percent of Austria's 8.5 million population, was an “emergency solution” serving as a “wake-up call for the EU”, the chancellor added.
State and federal leaders also discussed strengthening border controls, speeding up the deportations of failed asylum applicants and making it harder for family members to join those who settle in Austria.
The move is a further sign that the government is hardening its stance in Europe's worst refugee crisis since 1945.
Austria has become a key transit country for hundreds of thousands of migrants and refugees entering the EU – last year alone it processed 90,000 asylum seeker applications.
The influx has contributed to a surge in popularity of the far-right and sparked tensions within the ruling centrist coalition between Faymann's Social Democrats (SPÖ) and the conservative ÖVP party.
Until recently, Faymann had resisted the ÖVP's call for limiting asylum-seekers' numbers. But the coalition showed a united front on Wednesday, with both sides agreeing that a “drastic reduction” was needed.
The announcement comes in the same week as the launch of tougher border controls and the expected completion of a fence on Austria's main frontier crossing with Slovenia. The 3.7 kilometre barrier – set to be ready by Friday – will be the first of its kind inside the EU's passport-free Schengen zone.
Austria also signalled last week that it would follow neighbouring Germany's lead and begin turning back any new arrivals seeking to claim asylum in Scandinavia.