Passengers, who had to spend the night in Sydney, told media they smelt something burning inside the aircraft.
The Airbus A330 landed safely and there were no reports of injuries.
Images circulating on social media showed a large hole in the engine casing.
Several passengers said they had heard a loud sound coming from the left engine shortly after take-off.
One passenger told Australia's Seven News network: "All of a sudden we heard this noise... it kind of smelt like burning".
"I was really scared. Our group was terrified."
One woman on the flight told news agency Reuters: "The cabin crew went out and told us to fasten our seatbelts and tried to calm us down, but we were actually very panicked because we had no idea what was happening."
Passengers said the crew cleared the seats near the affected engine.
China Eastern Airlines said in a statement to the media that the crew had "observed the abnormal situation of the left engine and decided to return to Sydney airport immediately".
It added that all passengers would be placed on flights leaving on Monday.
Aviation safety authorities are now investigating.
'Too early to link'
Aviation expert Greg Waldron of consulting firm FlightGlobal told the BBC that it would be "difficult to say at this early juncture what caused such extensive damage" to the China Eastern plane.
He said investigators would likely look at all possible factors and examine maintenance records of the aircraft and engine. "They will also carefully assess whether a foreign object may have played a role in this," he said.
Mr Waldron added it would be "too early" to say whether the Sydney incident was linked to other cases, but it would be something investigators would consider.