The three F-100 air warfare destroyers and two 27,000 ton amphibious ships capable of landing up to 1,000 troops will be designed and partly-built by the Spanish state-owned military shipyard, Navantia.
They will be Australia's most advanced and expensive warships and equipped with the sophisticated US-made Aegis radar system.
The order adds to a wide-ranging upgrade of Australia's military capabilities, including a decision to purchase the US-led F-35 Joint Strike Fighter.
Brendan Nelson, the Australian defence minister, said the ships would be fitted out in Australia and would be launched from 2012 to 2018.
He said the new ships showed the government had placed "defence and security of its nation ahead of all other priorities."
"The 48 missile cells on this ship, the Aegis combat system on air warfare, that and many other things make it fully interoperable with our key ally the United States," he said.
Australia has in recent years boosted in its defence spending to more than $17bn a year amid concerns of growing instability in the Asia Pacific region.
The increase has prompted several of Australia's Asian neighbours to warn of a possible regional arms race.
But Foreign Minister Alexander Downer said Australia needed a strong defence force and the ability to deploy overseas quickly.
"It's not that we have hostile intent towards anybody," he told local television.