Australian users and publishers will be restricted from viewing or sharing domestic and international news. Overseas users also will be unable to access Australian news content.
Facebook has also blocked important government information pages including the weather bureau, health departments and police agencies.
In the process, charities and community groups have been targeted in the widespread censorship blitz.
The social media giant claims it has been left with no choice, arguing the bargaining code is poorly worded.
"As the law does not provide clear guidance on the definition of news content, we have taken a broad definition in order to respect the law as drafted," a Facebook spokesman said in a statement.
"However, we will reverse any pages that are inadvertently impacted."
The brash move is not entirely unexpected. Facebook first threatened to ban news for Australians in August and repeated the ultimatum before a Senate inquiry in January.
Communications Minister Paul Fletcher said the government would not back down to Facebook after it restricted Australian access to news.
"Facebook needs to think very carefully about what this means for its reputation and standing," Mr Fletcher said.
Treasurer Josh Frydenberg has spoken to Facebook founder Mark Zuckerberg following the blackout.
"He raised a few remaining issues with the government's news media bargaining code and we agreed to continue our conversation to try to find a pathway forward," Mr Frydenberg said.
Labor supports the media bargaining code but has criticised the government for its handling of negotiations with the tech companies. Opposition frontbencher Mark Dreyfus is demanding the government resolve the Facebook dispute.
"Facebook is going to dramatically alter the feed that Australians get and restrict the flow of news to Australians, the flow of real public-interest journalism and real news to Australians on Facebook," he said.
The question is one for the government to answer instead of patting yourselves on the back. Tell Australians what's going on with Facebook. It's something that 18 million or so Australians are affected by.
As Facebook restricts the sharing of news, Google is striking deals in Australia to pay for journalism.
News Corp has become the latest publisher to sign an agreement with Google.
The internet giant has already struck deals with Seven West Media and Nine Entertainment, and is in talks with public broadcasters ABC and SBS, as well as Guardian Australia.
The three-year Google deal with News Corp goes beyond the Australian market, extending to the publisher's titles in America and the UK.
No other news publisher has reached a single deal with Google across multiple countries.
The media bargaining code is before the Senate after clearing the House of Representatives overnight.
The legislation, which has bipartisan support, will give the treasurer power to choose which companies are subject to it.
A panel - decided by the negotiating parties or the media watchdog - would hear offers and make a decision on payment for news content.