Australia's economy grew by 2.8% in the final three months of 2006, boosted by household spending and a mining boom.
Australia's drought is considered to be the worst on record
The year-on-year figure, which topped analysts' expectations, came despite the country experiencing its worst drought in a century.
Treasurer Peter Costello said strong levels of investment and profitability were "laying the foundations for ongoing prosperity".
But he warned the severe drought would continue to be a drag on the economy.
"The drought has drastically reduced farm production and seen agricultural incomes fall to very low levels," he said.
Australia's robust fourth-quarter gross domestic product (GDP) was powered by solid growth in consumption as well as strong mining investment on the back of higher commodity prices.
Analysts had been expecting the economy to show more modest growth of 2%, following three interest rate rises in 2006.
On a quarter-on-quarter basis, the economy grew by 1% from the third quarter, the Australian Bureau of Statistics reported.