The new rules will not mean offices, schools or restaurants have to close, but will cause the shutdown of cinemas and other entertainment spots, while limiting family get-togethers to five people indoors and 10 outdoors.
For the first time, masks will have to be worn outdoors.
Taipei’s government has already ordered bars, nightclubs and similar venues to shut.
Health Minister Chen Shih-chung said a “level of risk” in certain hot spots, such as Taipei’s gritty Wanhua district, had spurred the decision to raise the alert level.
“Only by doing this can infections be dealt with and controlled,” he told reporters.
People should avoid travel between Taipei and the rest of the island to prevent spreading the infection, Chen added.
President Tsai Ing-wen’s spokesman said she would reduce the number of “unnecessary meetings” or public events. The presidential office is close to Wanhua.
The rising community infections unnerved the stock market this week, but at the same news conference, Premier Su Tseng-chang reiterated that the island’s economic fundamentals remain good.
Taiwan has millions of vaccine doses on order from Moderna Inc and AstraZeneca Plc, though only a small number have arrived from the latter due to global shortages and vaccination rates remain low.
More vaccines will start arriving next month, Tsai has said.
Since the pandemic began, Taiwan has reported fewer than 1,500 cases among a population of about 24 million, most of them imported from abroad, but a recent rise in community transmissions has spooked residents.
The island has never gone into a full lockdown and its people are used to life carrying on near normal, despite the pandemic ranging in many other parts of the world.
Late on Friday, several universities, including the elite National Taiwan University, said they would immediately switch to remote learning, telling students to stay away from campuses.
Museums in Taipei, and the zoo, said they would shut too.