Australia could buy as many as 220 Tomahawk missiles and supporting equipment from the United States.
The United States has approved the sale of up to $US895 million ($1.3 billion) worth of the guided weapons, which initially would be fitted to the navy's Hobart-class destroyers, and could later be installed in the Viriginia-class submarines when Australia acquires them next decade.
"The strategic location of this political and economic power contributes significantly to ensuring peace and economic stability in the region," the US State Department said in a statement.
"It is vital to the US national interest to assist our ally in developing and maintaining a strong and ready self-defense capability."
Speaking to the ABC, Defence Industry Minister Pat Conroy said the missiles would be a deterrent to adversaries.
"We face the greatest strategic uncertainty since 1945. We face a regional arms race and a responsible government such as ours is dealing with that by investing in the best possible capability," Mr Conroy said.
"This is how we promote peace and stability, by putting question marks in any potential adversary's mind."
Tomahawk Land Attack Missiles are long-range guided missiles primarily used by the US and the British Royal Navy. They are a type of cruise missile.
The US State Department said the sale would improve Australia's ability to "interoperate" with US and British forces, as well as its ability to "contribute to missions of mutual interest".
"Australia will use the enhanced capability as a deterrent to regional threats and to strengthen its homeland defense," it said.
The missiles will primarily be provided by US weapons manufacturer Raytheon.
