Personally, I’d do a four hour stop, if nothing else it gives you a chance to walk about a bit and properly stretch your legs but get a through ticket so that you don’t have to collect and re-check your bags.
You don’t say how many personal days you have and what you like doing but The Blue Mountains are stunning, it’s around two hours by train from Central station in Sydney. If you like a bit of a walk, do the Coogee to Bondi walk, it’s about 5/6kms, coastal walk or you can do it in reverse.
Watsons Bay is lovely as is Manly, go on the ferry from circular quay and maybe the bus back, public transport is great, cheap and very reliable and frequent.
Some people might suggest climbing the Harbour bridge, that’s expensive but if it’s your thin, go for it, failing that, walk across the bridge itself or climb the pylon, which is on the bridge but cheaper than climbing to the top.
The botanical gardens are really good too.
Sydney is easy to walk around as it’s quite compact and not hilly.