"We have discovered up to 60 dead chickens in that farm. After a series of tests we have confirmed this morning that the chickens did die from the H5 virus," health secretary York Chow told reporters.
A health department spokeswoman said further tests were needed to determine if it was the deadly H5N1 strain of the virus, which has killed about 250 people worldwide since late 2003.
Chow said the outbreak was discovered after a dead chicken had been reported on Monday at the farm in the New Territories area of Hong Kong, near the border with China.
All chickens within a three-kilometre (1.9-mile) radius of the farm would be slaughtered, he said.
Chow said it was the first outbreak at a farm in Hong Kong since early 2003, and that he had raised the avian flu alert level in the city to "serious".
Local farms would be barred from selling chickens and eggs for 21 days and imports of chickens would be banned for the same period, Chow said.
All live chickens at one of the city's major wholesale markets, Cheung Sha Wan, would also be slaughtered.
The owner of the affected farm, surnamed Wong, told local broadcaster Cable TV that the chicken deaths had not been sudden.
"The chickens did not die in large numbers. They died one by one," he said.
Hong Kong was the scene of the world's first reported major H5N1 bird flu outbreak among humans in 1997, when six people died.
Infectious disease expert Lo Wing-lok said the outbreak could evolve into a crisis if the authorities failed to locate the source of the virus soon.
"It is a serious outbreak because we are not just talking about the death of one or two wild birds as happened over the last few years. The outbreak took place in a licensed farm and involved a much larger number of chickens," Lo told AFP.
"The authorities must locate the root of the outbreak and watch out for possible human infection cases in the next couple of weeks. Otherwise, the outbreak can evolve into a crisis."
Lo said the outbreak also brought the bird flu vaccine into question, as some of the infected chickens were vaccinated.
"This also makes us wonder whether the other vaccinated chickens in Hong Kong are also infected," he said, adding that the virus might have already mutated.
Earlier this year, Hong Kong announced plans to phase out the sale of live chickens, a popular practice in the southern Chinese city, after the H5N1 virus was identified in samples taken from four street markets in the city.
But the move faced strong opposition from chicken traders and farmers, who said customers preferred freshly-killed birds compared to imported frozen chickens.
Chow said some of the birds which had died had been vaccinated against the virus, but there were others that had not been inoculated.
He said an investigation was underway as to whether there was any lapse in bio-security arrangements at the farm.
Scientists fear H5N1 could mutate into a form which is much more easily transmissible between humans, triggering a global pandemic.