Local officials took action after the city's air quality index reached 437 at noon, a level that indicates dangerously high levels of contamination in the air, China Daily reported.
Some industrial companies were notified Friday afternoon to stop production and outdoor construction projects were instructed to shut down.
Thirty percent of vehicles used for public transportation were told stay off the streets.
The pollution level was among the worst ever recorded in the city.
Shanghai's official air quality index was at 416 by 10 a.m. and had jumped to 466 by 3 p.m., the South China Morning Post reported. The U.S. consulate in Shanghai measured the level at 503, which is considered "beyond index."
Children and the elderly were advised early in the day to stay home. Most inbound flights to Shanghai Pudong International Airport were canceled and more than 50 flights were diverted.
A cold front that arrived in the region Thursday night was too weak to blow away the smoggy conditions. Instead it brought in more toxic particles and pushed the smog southward. Forecasters do not expect conditions to improve until Sunday when a strong cold front penetrates the Yangtze River Delta.
China's high pollution levels also affect nearby countries. Officials from Seoul, South Korea, are expected in Beijing Wednesday to urge China to share pollution information with them.