The Only About Children premises on Storey Street in Maroubra was set on fire about 1am on Tuesday morning, police said. It is the fifth major anti-Semitic incident in the Sydney's east in three months.
"I utterly condemn this evil hate crime," Prime Minister Anthony Albanese said in a statement.
"My government will support NSW Police to hunt down the offenders and ensure they face the full force of the law through Operation Avalite."
The prime minister vows authorities will "hunt down" perpetrators of the childcare centre attack. (Jack Gramenz/AAP PHOTOS)
Officers established a crime scene and are investigating the circumstances surrounding the incident. The childcare centre is around the corner from the Maroubra Synagogue on Anzac Parade.
"Fire and Rescue NSW attended and found the ground floor well alight," police said in a statement.
"The blaze was extinguished, however the building sustained extensive damage.
"Offensive graffiti was also located spray painted on an external wall."
The building was unoccupied at the time of the attack and there are no reports of injuries.
Mr Albanese is expected to attend the scene, while NSW Premier Chris Minns was scheduled to hold a press conference to address the incident before 9am.
The attack comes with the nation's Jewish community reeling after vandals targeted the former Dover Heights home of Executive Council of Australian Jewry co-chief Alex Ryvchin on Friday.
The house was defaced with slurs and cars were set alight outside.
In its wake, legal experts have cast doubt on a federal coalition plan to set minimum jail terms for terrorism offences and displaying hate symbols.
Opposition Leader Peter Dutton announced his plan for tougher laws to combat anti-Semitism at Bondi Central Synagogue on Monday, as Mr Albanese asked Australian activists for calm during a six-week ceasefire in Gaza.
Terrorism offences would attract a minimum of six years in jail under the coalition's proposed laws, while those displaying terrorist organisation signs, Nazi symbols or performing a Nazi salute would face at least a year behind bars.
But there was no evidence mandatory sentences deterred offenders, Australian Lawyers Alliance spokesman Greg Barns said.
"Furthermore, mandatory jail terms lead to injustice," he said.
"They force courts to impose sentences where the circumstances do not warrant it because of the nature of offending, or the background of the offender."
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