The game, named Cronulla Monopoly after one of the beaches involved, invites players to "win back Australia" by buying and selling land in the southern beach suburbs.
Players must then use the proceeds of their virtual deals to fund various far-right groups including Australia First and the Patriotic Youth League, according to the game website.
Sydney's beaches were hit by violent clashes last December between white Australian youths and ethnic Lebanese-Australians.
A far-right website promoting the game said it was "for Aussies, commemorating the efforts of all those who had the guts to ... defend the Aussie way of life".
Morris Iemma, premier of the southern New South Wales state of which Sydney is the capital, said he was taking legal advice on banning the game under the state's anti-discrimination act.
"It promotes acts of violence against members of the community - simple as that," he said.
However, Iemma conceded it would not be simple to ban the game because federal government intervention required to either shut it down or block access to it.
Australia First posted a notice on its website denying it was responsible for producing the game, however it offered a link to the website where the game could be downloaded.
Police have mounted special summer patrols of Sydney's beaches in the past few days, including dog units, roadside vehicle checks and aerial surveillance, to prevent a recurrence of last year's violence.
"Our beaches are there for everyone to enjoy, regardless of their creed or colour," Carl Scully, the police minister, said.
"Our beaches are there for everyone to enjoy, regardless of their creed or colour"
Carl Scully, police minister
The riots erupted after simmering tensions boiled over when youths of Middle Eastern appearance allegedly assaulted two lifeguards on Corulla beach on December 4 last year.
A week later, several hundred whites gathered at the beachfront, chanting racist taunts and attacking people of Middle Eastern appearance.
That sparked several days of retaliatory attacks on whites by ethnic Arabs, primarily from Sydney's large Lebanese community.