The ban, which will take effect from July 1st 2017, was passed in an overnight session by the New South Wales parliament in Sydney, state Premier Mike Baird said.
Although opposed by the dog racing industry and sparking heated debate within his right-leaning coalition government, the ban is intended to save thousands of dogs.
Australian state bans greyhound racing after scandals
"I'm proud of the decision we have made to save thousands upon thousands of dogs from cruelty and death," Baird said in a statement Wednesday.
"It wasn't an easy decision, but it was the right decision," he said, adding that the government would help trainers and breeders whose livelihoods were impacted.
Australia has one of the world's largest greyhound racing industries, but Baird introduced the ban following a string of scandals including "live baiting" and the slaughter of tens of thousands of dogs.
Live baiting has been banned for decades in Australia but the national broadcaster revealed in 2015 that live animals including piglets, rabbits and possums were still being used as bait to train some of the nation's most successful dogs.
A subsequent state government inquiry found evidence of systematic animal cruelty, including the mass killing of dogs considered too slow to pay their way.
Animal protection society RSPCA New South Wales welcomed the ban as a "historic turning point for animal welfare", but several members of Baird's coalition government crossed the floor to vote against the legislation.
One of them, Nationals lawmaker Katrina Hodgkinson, said the decision to ban the industry had upset people in her rural constituency.
Thousands of greyhounds killed each year, Australia inquiry told
"When people have something involuntarily taken from them, when it's their passion and the reason for getting out of bed in the morning, it is natural for them to get upset or depressed or both, and wonder what's the point of it all," she told the Australian Broadcasting Corporation.
"These people are not criminals," she added.
State opposition leader Luke Foley said the ban was "breaking the hearts of thousands of good men and women across the state".
Foley said the ban would "criminalise an industry, a sport and an Australian way of life".
"We have the uncivilised and cruel ambush of working people," he said during the debate.
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