A crowdfunding page set up to help raise the funds for the painting raised its target of $11,000 (£6,000) in one day.
Ms Ardern was praised for her strong and empathetic response to the massacre at two mosques that killed 50 people last month.
A photo taken by Hagen Hopkins of her visiting victims of the attacks resonated around the world and was projected onto the world’s tallest building, Burj Khalifa in Dubai.
New Zealand today fell silent in honour of the mosque attacks' martyrs. Thank you PM @jacindaardern and New Zealand for your sincere empathy and support that has won the respect of 1.5 billion Muslims after the terrorist attack that shook the Muslim community around the world. pic.twitter.com/9LDvH0ybhD— HH Sheikh Mohammed (@HHShkMohd)March 22, 2019
It will now be painted alongside the Arabic word for peace on a 75-foot silo in the Melbourne suburb of Brunswick.
Organisers said the image has become "a beacon of tolerance, love and peace in these divisive times".
"[Jacinda Ardern's] complete embrace of the Islamic community, and in fact of all New Zealanders, as part of a whole that can never be divided by hate, has been both beautiful and powerful to witness," the group led by Breathe Architecture said on the crowdfunding page.
"We want this message, this moment in time, remembered. We want to learn from it, we want it to hold us up, to strengthen us."
The organisers said the owner of the silo had agreed to pay for the power to light up the mural.
Street artist Loretta Lizzio, who has also painted large murals in London and Vancouver, has been invited to paint the work, which is expected to be completed by the end of May.