Sydney schools cancelled outdoor excursions and scheduled sports games,and most kept students indoors during lunch.
The Department of Education said schools would consider alternative arrangements for staff and students in"extreme situations"where an entire school was heavily affected by smoke.
The smoke triggered fire alarms at buildings and train stations across the city.
Fire Brigade Employees'Union state secretary Leighton Drury said firefighters attended four times the number of false alarms they would be called to on any other day,because of the latent smoke.
"We normally do about 120 a day,but from midnight to 1pm we've had 250 and there are still another 12 hours,"he said."We need more resources to cover this stuff. We are still having to cover all the standard things like industrial accidents and rescues as well as the bushfires."
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The thick smoke forced the suspension of ferry services,while poor visibility at Sydney Airport caused flight delays of up to 30 minutes for several hours. A fire alarm was also triggered by smoke seeping into a terminal building.
Alarms were also triggered at five train stations including Chatswood and Leppington.
The smoke led to thousands of construction workers,electricians and apprentices abandoning work sites. The Electrical Trades Union said up to 1000 electricians and apprentices had left building sites including at Central Station and Westmead Hospital.
"Most sites have left and gone home after having safety checks. I haven't experienced this level of smoke before,"Electrical Trades Union national secretary Allen Hicks said."Bushfire smoke is especially hazardous for those doing strenuous outdoor work."
Unions NSW assistant secretary Thomas Costa said nobody,apart from emergency service workers who had accepted the risk,should be forced to work outside."The current level of toxicity in the air is 10 times the safe working limit,"he said.
The Sydney University branch of the National Tertiary Education Union advised members to stop work or make alternative arrangements if they were concerned about air quality in their workplace.
Health authorities said Sydney had suffered"some of the worst air quality we've seen"and urged the public to take the conditions seriously.
"When conditions are like this people should avoid outdoor activity as best as they can. Young children are also at more risk because they have developing lungs,"NSW Health's director of environmental health Richard Broome said.
"The smoke we've been experiencing for the last month or so is certainly unprecedented."
NSW chief health officer Kerry Chant urged people with underlying respiratory conditions such as asthma and heart disease to take particular care.
The City of Sydney took measures to help homeless people affected,including providing temporary accommodation for those who suffered from existing respiratory conditions.
"As the thick smoke settles over Sydney and authorities advise us to spend less time outdoors,we must look after those who don't have a place of their own to escape the pollution,"Sydney lord mayor Clover Moore said.
The council also closed outdoor pools.
Cr Moore said the bushfires ravaging NSW were a reminder that climate change was"super-charging natural disasters",and she urged people to reduce their exposure to hazardous air-quality levels.
With Nigel Gladstone,Sian Brain and Natassia Chrysanthos