As part of the plan, the Sydney Morning Herald and the Melbourne Age will shift from broadsheet format to a more compact, tabloid size and two printing facilities will be shut.
"No one should be in any doubt that we are operating in very challenging times," said chief executive Greg Hywood.
"Readers' behaviours have changed and will not change back. As a result, we are taking decisive actions to fundamentally change the way we do business."
Fairfax, which has newspaper, radio and digital interests, is the main rival in Australia to Rupert Murdoch's News Limited.
Stock in the company have fallen nearly 85 percent in the past five years and management has come under pressure recently from the world's richest woman and key shareholder Gina Rinehart, who demanded action.
Its shares gained four percent on the announcement and were trading at 63 Australian cents soon after the market opened.
Fairfax said it will introduce subscriptions for its Sydney Morning Herald and The Age websites in early 2013, similar to News Limited, which already charges with access to its main title, The Australian.
Print versions of those two mastheads will shrink to the size of its Australian Financial Review newspaper from March 4, 2013.
The job cuts will come over three years and together with the closure of printing facilities in Sydney and Melbourne will result in annual savings of Aus$235 million (US$238 million) from June 2014, the company said.
One-off costs associated with the changes will be around Aus$248 million.
Fairfax newspapers said Hywood has told staff that 20 percent of job losses would be from editorial, setting the scene for possible industrial action.
Last month, staff called a snap 36-hour strike after the company said it planned to move editorial production of several regional newspapers to New Zealand, with the loss of 66 jobs.
"The changes announced today have been selected after considering the merits of a full range of structural alternatives, including a demerger," Hywood said.
"The package of strategic initiatives is bold, and several are difficult, particularly as they will impact on some of our people.
"However, we believe that they are in the best interests of Fairfax, our shareholders, and ultimately the majority of our people."