Foreign Minister Julie Bishop said the Tony Abbott government strongly condemned the violent campaign being waged by the Islamic State of Iraq and the Levant (ISIL) - also abbreviated as ISIS or Islamic State of Iraq and Syria - in north and north-west Iraq that had sparked a humanitarian crisis, Xinhua reported.
"We express our deepest condolences for the loss of life in recent attacks, and our grave concern at the widespread displacement of Iraqis and damage to property," Bishop said.
Australia will work with the World Food Programme and the UN High Commission for Refugees to deliver food, medical assistance, tents, clean water and hygiene kits to those Iraqis fleeing to safety.
Sunni extremists from the ISIL group, which wants to create an Islamic caliphate across the Middle East, have rampaged across Iraq in the past two weeks and are threatening capital Baghdad.
Bishop told ABC radio that an "extraordinary" number of Australians - about 150 - had been or were currently fighting with extremists in Iraq and Syria.
She said she had cancelled several passports on advice from intelligence agencies and that people with experience of fighting for terrorist groups in the Middle East could pose a security risk if they were allowed to return to Australia.
"In Syria it seems that over a period of time they have moved from supporting the more moderate opposition groups to the extreme, and that includes this brutal extremist group ISIS."
"We are concerned that Australians are working with them, being radicalised, learning the terrorist trade and if they come back to Australia of course it poses a threat."
Her colleague, Immigration Minister Scott Morrison, said the Australia government was considering cancelling the visas or revoking citizenship for dual nationals who have fought alongside extremists.
Bishop said Iraq, where cities have been steadily falling to militants since an onslaught from the north began nine days ago, was confident of holding Baghdad, where the situation was "tense but stable".
She welcomed Iraqi Prime Minister Nouri al-Maliki's call for national unity.
"The problems between the Sunnis and the Shias are exacerbated by his manner of excluding them from the government. He's now calling for national unity, but that's a start," Bishop said.
"We need to see a political solution because a military solution could be catastrophic."
Iraq has asked the US to launch air strikes against the Sunni insurgents but Bishop said Australia had received no request for military help from either Iraq or the US.