The economy grew at an accelerated pace in the final three months of 2006, despite the worst drought in over a century making a severe dent in rural exports.
Strong household consumption and government spending, as well as companies restocking their shelves, helped the economy grow at its fastest pace since the June quarter of 2005.
The Australian Bureau of Statistics said gross domestic product (GDP) grew 1.0 per cent in the fourth quarter after increasing by 0.3 per cent in the third quarter.
The growth rate in the year to December was 2.8 per cent.
Economists had expected GDP to grow 0.6 per cent in the fourth quarter for an annual rate of 2.0 per cent.
Prime Minister John Howard said the figures were good news for the Australian economy in the face of the nation's drought.
"The national account figures are a magnificent indication of the strong economic management of this country, not withstanding the ravages of the drought," Mr Howard told reporters at Tynong, south-east of Melbourne.
"That is a fantastic figure given that there's been a catastrophic decline in farm GDP because of the worst drought in 100 years.
"Just imagine where our growth figure would have been if we had not had this terrible drought.