Beaches are a way of life for many Australians
The swimmer, Guy Swain, hit a hidden sandbar while diving into the waves in an area patrolled by lifeguards and marked out by flags as safe in 1997.
A Supreme Court jury decided Sydney's Waverley Council was responsible and awarded the surfer $2m (Aus 3.75m) in damages.
Some local authorities on Tuesday threatened to close their beaches altogether or to withdraw lifeguards from beaches. Local councils were seeking urgent legal advice about their liability for accidents they believe are almost impossible to prevent.
Waverley councillor George Newhouse suggested replacing lifeguards with a sign just saying: Warning. Life is Dangerous.
Insurance fears
New South Wales state opposition spokesman on insurance regulation Peter Debnam, whose electorate takes in Bondi, described Monday's court ruling as "another example of the insanity of public liability".
He said if reforms to the legal system were not made, beaches would "become no-go zones."
Guy Swain, 28, was left a quadriplegic after the accident at the beach in 1997. The court found the council was negligent in failing to warn of the existence of the sandbar.
Waverley Council said it would consider an appeal.
"Based on the facts as they were presented in the court, and based on the judgment, I think every beach-side council has got to consider exactly how you can possibly manage a beach and protect your community against liability," said mayor Paul Pearce.
Mayor of Queensland's Gold Coast, Gary Baildon, offered to help fund the appeal saying the court ruling had implications for every council in Australia with responsibility for beaches.
"I'm absolutely stunned at the decision because you have to ask yourself if we should be in the business of trying to protect people from themselves," said Mr Baildon, whose council controls about 57 km (35 miles) of popular beaches.
Australia's volunteer surf lifesavers on Tuesday called on state governments to cap compensation payouts against charitable organisations.
"Our premiums have increased by over 300% over the last two years," said Surf Life Saving Queensland chief executive Brett Williamson. "We'll be lucky to get insurance, let alone afford it when our policy runs out in October this year."