With the federation of the six colonies on January 1, 1901, Sydney became the capital of the State of New South Wales. The city's early 20th-century landscape was shaped by significant public health concerns, most notably the bubonic plague outbreak in 1900, which prompted government initiatives to modernize wharves and demolish inner-city slums.

The onset of the First World War in 1914 saw an overwhelming number of Sydney males volunteering for the armed forces, surpassing the processing capacity of Commonwealth authorities and helping to alleviate unemployment. As soldiers returned from the war in 1918, they were promised "homes fit for heroes" in newly developed suburbs like Daceyville and Matraville. This period also witnessed the rise of "garden suburbs" and mixed industrial-residential areas, particularly along rail and tram corridors. By 1926, Sydney's population had surged to one million, reestablishing its position as Australia’s most populous city.

The government undertook massive public works projects to create jobs, including the electrification of the Sydney rail network and the iconic Sydney Harbour Bridge, which opened on March 19, 1932. However, the Great Depression of the 1930s severely impacted Sydney, leading to a near-complete halt in new construction. By 1933, the unemployment rate for male workers soared to 28 percent, with figures exceeding 40 percent in working-class areas like Alexandria and Redfern. Shanty towns, such as "Happy Valley" in La Perouse, emerged as many families were evicted from their homes. The Depression heightened political divisions, exemplified by a dramatic ribbon-cutting incident during the opening of the Sydney Harbour Bridge by Labor premier Jack Lang, who was upstaged by far-right activist Francis de Groot.

In January 1938, Sydney celebrated the Empire Games and the 150th anniversary of European settlement in Australia. A journalist captured the city's allure, describing its "golden beaches" and "sub-tropical splendours." However, the event was marred by a congress of Indigenous Australians declaring January 26 as "A Day of Mourning" to acknowledge the impact of colonization.

The outbreak of the Second World War in 1939 spurred industrial development in Sydney, resulting in a near-elimination of unemployment. Women entered the workforce in roles traditionally held by men. The city faced direct threats during the war, including attacks by Japanese submarines in 1942, prompting households to build air raid shelters and conduct drills. Military infrastructure was expanded, with the Garden Island Tunnel System and various fortifications constructed to defend Sydney Harbour.

The post-war era saw a significant immigration and baby boom, leading to rapid population growth and the spread of low-density housing across the Cumberland Plain. Between 1947 and 1971, immigrants—primarily from Britain and continental Europe—accounted for over three-quarters of Sydney’s population increase. The newly formed Cumberland County Council facilitated the development of suburbs like Green Valley and Mount Druitt, while established centers such as Parramatta, Bankstown, and Liverpool evolved into integral parts of the metropolitan area. Although manufacturing was a major employer during this period, service industries began to dominate the job market as the post-war economic boom continued.

A historic moment occurred in 1954 when an estimated one million onlookers welcomed Queen Elizabeth II to Farm Cove, marking the first visit by a reigning monarch to Australian soil. This event symbolized Sydney's growing importance on the national and global stage.

As high-rise development increased and suburbs expanded beyond the planned "green belt" of the 1950s, community protests emerged. In the early 1970s, trade unions and resident action groups implemented green bans to protect historic areas like The Rocks from development. Concurrently, the Sydney Opera House faced controversy regarding its cost and design disputes between architect Jørn Utzon and government officials. However, after its opening in 1973, the Opera House quickly became a beloved tourist attraction and emblem of the city.

The gradual reduction of tariff protection beginning in 1974 marked Sydney's transition from a manufacturing hub to a "world city." From the 1980s onward, immigration surged from Asia, the Middle East, and Africa, contributing to Sydney’s multicultural fabric. By 2021, the city's population had exceeded 5.2 million, with 40 percent of residents born overseas, and countries like China and India surpassing England as the largest sources of overseas-born residents. This demographic shift underscores Sydney's evolution into a dynamic global city, rich in diversity and culture.