Australia's Prime Minister Julia Gillard urged people to prepare for evacuation as river levels rose in the country's flooded south on Sunday, threatening hundreds more homes.

Soldiers were called in and a natural disaster declared in Victoria state after intense rain pushed rivers to their breaking point, flooding at least 250 homes and isolating entire towns, emergency officials said.

Scores of homes were under water and tens of thousands of people were left without power after drenching rains produced the worst flooding in more than a decade.

"The storms have caused extensive damage to property, forcing many residents to leave their homes. Thousands of others are without power," Gillard said.

"In some areas flood waters will continue to rise so residents should continue to monitor the local forecasts and be prepared to evacuate if necessary," she added.

State Premier John Brumby said the army would help sand-bag the worst affected areas and assist with evacuations, warning that some rivers would not reach their peak for a number of days still and the worst was yet to come.

"The real issue now is the next 36 to 48 hours... those floodwaters will continue to increase and continue to move," said Brumby.

"We expect the number of houses (flooded) to increase ... tonight and tomorrow so there could be hundreds more that are affected," he added.

Some areas had received more than 200 mm of rain and the State Emergency Service (SES) said it was the region's worst flooding since the 1990s. Hundreds of people slept on classroom floors after being evacuated from their homes and the SES said it had received more than 2,000 calls since midnight Saturday.

About 40,000 homes were without power and the sewage system in some towns had also been overloaded, spilling effluent into the surging waters. Skiers were stranded at mountaintop resorts overnight as the wild weather triggered landslides.

Officials used a new SMS and telephone warning system, developed in response to last year's Black Saturday firestorm, which killed 173 people and razed entire towns in the state.

The Bureau of Meteorology canceled its severe weather warning as rains eased but said flood warnings remained in place for several areas.