The move was announced by Prime Minister Jacinda Ardern tonight after a family of three living in the South Auckland suburb of Papatoetoe tested positive for Covid-19.
They are the country's first cases of community transmission since late January when a returned traveller in Northland tested positive after leaving quarantine.
Ardern said the alert change came out of an abundance of caution and would be reviewed every 24 hours.
"Three days should give us enough time to gather further information, undertake large scale testing and establish if there has been wider community transmission," Ardern said.
"I think it is an example of how tricky Covid-19 has always been."
She said it was a "good, timely reminder too, to everyone, please turn on the Bluetooth function and keep scanning".
The precautionary approach had served New Zealand well to date, Ardern said.
Cabinet weighed up many factors and decided moving the country up alert levels was the necessary response, she said.
"Cabinet's plan is based on the best science and what we know works from previous cases here and responses overseas. "
The prime minister has assured the public that the vaccine programme would not slow down because of the level changes.
Prada Cup organisers have decided to postpone Wednesday's races.
Cabinet's next decision will be announced tomorrow at 4pm.
Level 3 restrictions for Auckland
Level 3 means Aucklanders will need to stay home. They should also work from home if possible.
If they venture out, Aucklanders must maintain 2m distance.
Schools and early childhood centres will stay open for children of essential workers.
Supermarkets, pharmacies, primary produce retailers, and petrol stations can remain open.
"No need to rush out this evening to any of these places. But we are again asking all other businesses that usually interact face to face with customers to move to non-contact methods - click and collect, or online ordering.
"The main rule here is maintaining physical distancing between staff and not physically interacting with customers."
Public venues will be closed. For example, libraries, museums, cinemas, food courts, gyms, pools, playgrounds, markets.
Gatherings outside of your bubble are prohibited, with exceptions for funerals and weddings which are limited to 10 people. However, Ardern encouraged people to postpone these events if possible.
A border will be put in place in Auckland. Those who need to travel through the border can apply for an exemption.
"If you are in Auckland we ask that you use a face covering if you need to leave your home."
What level 2 means
Level 2 for the rest of the country means businesses and schools remain open, but with social distancing.
People are encouraged to practice good hygiene, keep track of where they have been and stay home if they are unwell.
People are asked to maintain a distance of 2m from others in public spaces and in retail stores.
In other places like workplaces, cafes, restaurants and gyms, people must stay 1m apart.
Hospitality businesses must keep groups of customers separated, seated, and served by a single person with a maximum of 100 people at a time.
Masks are mandatory on public transport and encouraged where physical distancing is not possible.
Gatherings, including weddings and funerals, are limited to 100 people.