Batemans Bay, a coastal town south of Sydney, has been invaded by more than 100,000 bats.
The New South Wales state government said it would commit about $1.8m to help the local council to disperse the animals, according to local media.
The animals, known as grey-headed flying foxes, are considered a vulnerable species, meaning that they must be dispersed using non-lethal means, like smoke, or noise.
Animal rights groups have called for residents to remain patient and wait for the bats to move on of their own accord.
Residents cannot open windows and complain of the noise and odour from the animals.
"We've had many residents complain, they feel they're prisoners in their own homes, they can't go out, they have to have air conditioning on the whole time, windows closed," New South Wales Environment Minister Mark Speakman said.
"[The circumstances] really amount almost to a state of emergency."
Mayor Lindsay Brown said a range of options were being considered.
"The current method that seems to be the one that's working the most ... is extremely loud industrial noise combined with smoke and combined with bright lights in an effort to make the area where the flying foxes roost to be as uncomfortable as possible," broadcaster ABC quoted him as saying.
|Residents cannot open windows and complain of the noise from the animals [AP]