Chancellor Werner Faymann said numbers would be capped at about 37,500 in each of the next four years, compared to the 90,000 applications last year.
Serbia responded by saying it would limit migrant passage to those seeking asylum in Austria or Germany only.
The head of the European Commission has called for a summit on migration.
Jean-Claude Juncker said he was worried there would not be enough time to address the issue at the next extraordinary summit of the EU's 28 member-states, due on 18-19 February.
It is expected the UK's membership of the EU will dominate that meeting.
The EU is drawing up plans to share the "burden" of refugees more evenly among member states, scrapping the rule that means they must claim asylum in the first country they arrive in.
Cameron faces refugee 'burden' battle
There has been speculation this will shift the refugee burden from southern EU states to northern ones.
With some EU states already bringing in temporary border controls, the Commission fears the passport-free Schengen area could collapse if a solution is not worked out by March.
Austria has become a major transit country for migrants seeking to claim asylum in  Germany.
Correspondents say the influx has contributed to the popularity of the far right in Austria, sparking tensions in the governing coalition.
"We can't take in all asylum-seekers in Austria," Chancellor Faymann said after a national asylum summit in Vienna.
"We must also step up controls at our borders massively," he added.
In Belgrade, Labour Minister Aleksandar Vulin, the government's coordinator on the migrant crisis, said: "From today, based on the decision of the Austrian government... migrants will not be able to continue their travel if they have not expressed intention to seek asylum on the territory of Austria or Germany."
More than one million refugees and other migrants entered the EU clandestinely last year, mainly by sea, the majority of them seeking asylum in northern European states.
Most were from Syria, gripped by civil war, followed by Afghanistan and Iraq.
At least 31,000 have arrived by sea so far this year despite the winter weather, the UN refugee agency says.

Sanchez, 40, signed a contract extension in January to remain in charge until the end of next season.
However, Deportivo won just two of their last 22 league games and were beaten 8-0 at home by Barcelona on 20 April as they finished 15th.
Former Spain and Real Madrid midfielder Sanchez was in charge of Deportivo for 13 months.

Steven Walters, 48, pleaded guilty to two counts of sexual assault at Stafford Crown Court in September.
Chief Constable David Thompson said the case represented "one of the worst violations of policing integrity I've ever seen".
Walters was also found guilty of gross misconduct at a disciplinary hearing on Monday and dismissed from the force.
More on this and other stories from Birmingham and the Black Country
The crimes took place between February and April 2015.
Walters, who was based at Sutton Coldfield, approached a woman in her 20s, who he offered a lift home in his patrol car in the early hours.
After a colleague asked the woman "what she was doing at that time of night in that dress", Walters placed his hand on her thigh when she was in the car, leaving the victim feeling "creeped out".
In the second assault, the court heard he touched the victim under her skirt in her own home while her children were in other rooms.
He attempted to kiss her face and neck, and also asked to be taken to a bedroom.
Sentencing, Judge Paul Glenn said Walters had shown no remorse, adding: "The public are entitled to have faith in police officers and to trust them in the discharge of their powers and responsibilities.
"You exploited that trust and you have brought disgrace on yourself and indeed the force you served."
Derrick Campbell, from the Independent Police Complaints Commission, praised the victims for their "courage and bravery" in reporting his crimes.
"[Walters] completely abused his position of trust by targeting and taking advantage of vulnerable women for his own sexual gratification," he said.
The Austrian government has said it will sharply reduce the number of asylum applications it accepts this year compared with 2015.
[NEXT_CONCEPT]
Deportivo La Coruna have sacked boss Victor Sanchez after a disappointing end to their season in La Liga.
[NEXT_CONCEPT]
A West Midlands police officer who admitted sexually assaulting two women has been jailed for four years.