The search will also look for the German raider Kormoran which sank the Sydney in a battle off Western Australia in 1941.
The month-long deepwater operation is expected to begin next January.
It comes after the Navy officially dismissed recent claims by a "well meaning" group of amateur salvage divers who thought they had found the Sydney's final resting place closer to the Western Australian coast than where it was thought to have sunk with all 645 hands lost.
The Minister Assisting the Minister for Defence, Bruce Billson, announced the new search today with members of the Sydney Search foundation on the flight deck of the namesake guided missile frigate HMAS Sydney at Garden Island.
The new search will employ technology, including two submersibles that helped to locate the liner Titanic in the Atlantic Ocean.
Mr Billson said the Federal Government had approved a further $2.9 million grant to assist HMAS Sydney Search Pty Ltd on top of an $1.3 million grant approved in August 2005.
In addition, the Western Australian Government has contributed $500,000 and the NSW Government $250,000.
The search will concentrate first on locating the wreck of the Kormoran based from accounts of the sea battle's location given by 350 German officers and sailors captured after they were forced to abandon the vessel.
Sydney Search Foundation Director Ted Graham said there was a "75 to 80 per cent chance of locating the Kormoran.
Once this was achieved the wreck will be used as a reference point for the extended search for the Sydney.
An area encompassing 5000 square kilometres in the Indian Ocean with depths ranging from five to six kilometres will be scoured.
"The Australian Government's commitment to support a large-scale search for HMAS Sydney II is underlined by the $4.2 million in funding it has now committed to the task," Mr Billson said.
"The location of the ship's final resting place remains our nation's most enduring maritime mystery. The Sydney tragedy has had a profound effect on our nation, as it and its crew were sources of great pride as a result of their earlier World War II triumphs in the Mediterranean Sea against enemy forces.
"We are hopeful that the additional funding will enable a meaningful search to commence on the water in the near future, drawing on the extensive knowledge and expertise of HMAS Sydney Search, our own Royal Australian Navy and Mr Mearns," Mr Billson said.
"Mr Mearns has an outstanding track record of locating shipwrecks and was successful in finding the celebrated Royal Navy battle-cruiser HMS Hood and German ship Bismarck."
HMAS Sydney Search foundation chairman Ted Graham said that while the large search area and water depth meant this was an extremely challenging assignment, advances in technology greatly improved the chances of success.
"We now have a remarkable search capability in the form of state-of-the-art wide-swath side-scan sonar technology to cover this large area where we believe the wrecks of both Sydney and Kormoran have sunk," he said.
"This is proven and highly-efficient sonar technology has been used to find other significant shipwrecks like HMS Hood, Bismarck, Derbyshire as well as many other smaller wrecks sunk in much deeper water.
"We also know more about the seabed in the search area thanks to the efforts after the kind donation of ship time made by Perth-based Geo Subsea Pty Ltd, which provided its multi-beam survey vessel to conduct a preliminary survey through the area. Fortunately, the survey showed that the seabed was clear of major geologic features which could complicate our sonar search," said Mr Graham.
Les Kennedy's uncle Robert John Kennedy, 21, was a stoker 2nd class on HMAS Sydney.
© 2007 Brisbane Times