Prime Minister Kevin Rudd described Australia as a "broadband backwater" and likened the project to building the railways in the 19th Century.
He dropped plans for a private tender, in favour of a government investment of about A$43bn ($30bn, £20.9bn)
Mr Rudd had promised a fast, affordable broadband system in the 2007 elections that brought him to power.
Private firms, such as Singapore's Optus and Canada's Axia NetMedia had been bidding for a A$10bn - A$15bn fibre-to-the-node network offering speeds up to 12 megabits per second.
Experts advised the government to choose instead the more ambitious fibre-to-the-home network offering 100 megabits per second, accessible by 90% of Australian homes.
Turbo-charged
Mr Rudd described the broadband plan as "the single largest nation-building infrastructure project in Australia's history", which would play a huge role in "turbo-charging Australia's economic future".
"Just as railway tracks laid out the future of the 19th Century and electricity grids the future of the 20th Century, so broadband represents the core infrastructure of the 21st Century," he said.
Under the new plan, the government will initially invest A$4.7bn with the overall investment from government and the private sector reaching up to A$43bn over eight years.
Construction would begin early next year and the government would sell its stake in the broadband company five years after the network was up and running.
Australia's largest telecoms firm Telstra was excluded from the initial tender but Communications Minister Stephen Conroy said it would be invited to take part in the new project.
The government also said it was considering a major regulatory shake-up in the telecoms industry.
It has proved difficult to bring fast internet to all Australians because of the large clusters of population in coastal areas contrasting with small, far-flung rural communities across a vast land.
Mr Rudd linked the project to his plans to help Australia cope with the global financial downturn, saying it would create 25,000 jobs a year during construction.
