Police said they were called to the house in the suburb of Mosman by an 18-year-old woman. They said officers are in the house "examining the device and supporting the woman".
Assistant commissioner Mark Murdoch said they are treating the suspicious package as still live and said the woman was unable to move away from the device.
Emergency crews have evacuated nearby houses in Mosman, which is one of Sydney's wealthiest suburbs. Several streets have been cordoned off, and ambulances and fire crews are at the scene.
Roger White, a reporter with 2UE Radio in Sydney, said police were appealing for local residents to come forward if they had seen anyone in the area who should not have been there.
"We understand she had this device placed around her neck, with a ransom note attached to it, by someone who burst into her home and then took off," he said.
Summary of story from BBC News, August 3, 2011
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