Police and Department of Primary Industries investigations are under way.
Primary Industries Minister Ian Macdonald described the alleged breach of equine flu movement restrictions as serious.
A Sydney man was reported to the department late on Wednesday after he allegedly transported a horse from Randwick racecourse to a property near Orange.
"The owner of this property has done the right thing by immediately reporting this illegal movement of a horse from the purple zone to Orange, which is currently in the amber zone, and therefore free of horse flu," Mr Macdonald said.
"This enabled staff at DPI's Disease Headquarters in Orange, with assistance from the Rural Crime Investigation Unit, to take immediate action, tracking the movement of the vehicle to Bathurst where it was pulled over.
"The vehicle has now been thoroughly decontaminated, and the property where the horse was delivered has been placed in quarantine as a precaution."
Mr Macdonald said while there was minimal risk of the horse having any infection, the department was taking the matter seriously and would take all necessary precautions to reduce the chance of spread of the virus to the Orange area.
"This horse has also been isolated from all other horses on the property and will remain isolated until the next course of action is determined.
"Circumstances surrounding this alleged illegal movement will be thoroughly investigated."
Penalties for the movement of horses without a permit include fines of up to $A44,000 and 12 months imprisonment. Vehicles and equipment can also be immediately confiscated.
"It is essential that people adhere to the current movement restrictions and biosecurity measures we have in place as part of the horse flu response," he said. "Those people who do the wrong thing face very severe penalties."
Meanwhile, red zones in NSW at Mudgee and Temora have been downgraded to amber after confirmation that the disease has been eradicated from both districts.
Mr Macdonald said the rezoning showed that movement restrictions, zoning and vaccination were successfully containing and eradicating EI.
"Mudgee and Temora are the latest red zone pockets to be cleared of horse flu in the past three weeks, following on from Dunedoo, Berry and Wauchope.
"I am confident that as long as all horse owners continue to adhere to the current movement restrictions and maintain strict biosecurity, I will be able to announce further good news in coming weeks.
"But I must stress that it could take just one person dropping their standard of disinfection to create a fresh breakout that would put us back to square one."
Minister Macdonald said extensive testing of horses and investigations throughout the Mudgee and Temora districts was required to achieve 'proof of freedom' status.
"The next step in the Temora district is to start testing in preparation for further downgrading the amber zone in that region to green," he said.
"The Government's aim is to progressively downgrade the risk in infected areas as the virus burns out, freeing up some movement restrictions, easing disinfection requirements and progressively enabling the resumption of horse events.
"When the time comes, all other infected regions will also need to go through at least six weeks of testing and investigations to demonstrate their freedom from horse flu.
"In the meantime movement restrictions and mandatory biosecurity standards must continue throughout NSW to contain the virus and let it burn out in already infected areas."