Tuesday's 40.9 degrees had eclipsed the previous record of 40.3 degrees, set in 2013. On Wednesday, the average maximum temperature was recorded at 41.9 degrees, the BBC reported.
Parts of NSW, of which Sydney is the capital, hit temperatures in the early-40s on Thursday.
More intense heat was forecast for the rest of the week.
Premier Gladys Berejiklian announced the seven-day state of emergency due to forecasts of worsening conditions.
This is the second such declaration in the state since last month.
"The biggest concern over the next few days is the unpredictability, with extreme wind conditions (and) extremely hot temperatures," she told the media on Thursday.
Bushfires have been raging in Australia for months, killing six people, destroying hundreds of homes and burning millions of hectares of land.
The crisis - worsened by tinder-dry conditions from a severe drought - has spurred criticism of the nation's climate policies.
A lot of outrage on social media has also been directed at Prime Minister Scott Morrison for going on an overseas holiday during the emergency.
Some 500 people on Thursday protested outside his Sydney residence, demanding action on climate change, reports the BBC.
According to the Bureau of Meteorology (Bom), temperatures are expected to exceed 45 degrees in NSW, Victoria and South Australia this week.
Two major fires are currently burning near the outskirts of Sydney, including a "mega blaze" which has burnt over 400,000 hectares.
On Thursday, three firefighters suffered serious burns after being "enveloped by fire" near the town of Bargo, officials said. They added it was too early to say how many houses had been razed.
Smoke from the fires blanketed Sydney again, pushing air quality beyond "hazardous" levels in parts of the city.
( With inputs from IANS )