Sheep and lambs from 14 farms in southern Queensland and one from central New South Wales were surveyed to determine the prevalence of Shiga toxin-producing Escherichia coli (STEC). STEC, isolated from 45% of 144 sheep faeces collected on the farms and 36% of 72 lamb faeces from abattoir yards, were tested for the presence of genes encoding virulence factors. Most (64%) of the 117 STEC isolates contained Shiga toxin 1 and 2 genes, 22% contained those encoding Shiga toxin 1, and 14% contained genes encoding Shiga toxin 2. The genes encoding the E. coli attaching and effacing factor were present in 2.6% of STEC and 26% contained the enterohaemolysin gene. The isolates that contained the E. coli attaching and effacing gene were serotype O157:H. This study has shown that STEC are widely distributed in eastern Australian sheep and lambs and are shed in their faeces prior to slaughter. Thus, there is potential for contamination of carcasses and entry of STEC into the human food chain.