Australia passed sweeping new security laws in October aimed at stopping people from becoming radicalised and going to fight in conflicts such as those in Iraq and Syria, where scores of Australians have joined militant groups, as well as preventing attacks at home.
Despite those new powers, Abbott said Monis was not on any security watchlist and managed to walk undetected into the Lindt Chocolate Cafe with a legally obtained shotgun on a busy workday morning. Monis was convicted in 2012 of sending hate mail to the families of Australian soldiers killed in Afghanistan.
Abbott said the national and New South Wales state governments would conduct an urgent review to identify where the system had failed in order to understand how similar attacks could be stopped in future.
"We do need to know why the perpetrator of this horrible outrage got permanent residency. We do need to know how he could've been on welfare for so many years. We do need to know what this individual was doing with a gun licence," Abbott told reporters in Canberra.
"We particularly need to know how someone with such a long record of violence, such a long record of mental instability, was out on bail after his involvement in a particularly horrific crime. And we do need to know why he seems to have fallen off our security agencies' watchlist, back in about 2009."
The justice system in New South Wales (NSW), Australia's most populous state, was also under fire.
"We were concerned this man got bail from the very beginning," said NSW Police Commissioner Andrew Scipione.
Read MoreSydney hostage crisis in pictures
Police had requested courts refuse Monis bail but were not paying special attention to him because his charges were not linked to political violence and he was not on any watchlist, he said. Abbott also raised concerns about the bail system.
Greg Barns, a lawyer and a spokesman for the Australian Lawyers Alliance, told Reuters lengthy delays between arrests and cases being heard, along with the presumption of innocence, meant more people were on bail for longer.
"There aren't enough courts, there aren't enough judges, there is not enough legal aid. Every sector within the criminal justice system is under-funded by the government," he said.
Funding for the state's criminal justice system fell 11 percent in 2012/13, according to a government report, while delays in hearing criminal matters in the state Supreme Court grew to 6.5 months in 2013 from 1.5 months in 2010, according to its annual report.
New, tougher bail laws have already been passed in the state but delays caused by the need to train police, courts and lawyers mean they don't come into force until late January.
Police said on Wednesday a man had been charged with making threatening phone calls to a mosque in western Sydney, one of the few confirmed reports of what was feared could be a wave of anti-Muslim sentiment in the wake of the crisis.
In 2005, ugly, racially charged tensions between residents from the largely white beachside neighbourhood of Cronulla and Muslim youths from western Sydney degenerated into days of bloody riots involving thousands of people.
"There has been some issues of hate or bias crime but it's certainly minimal compared to the outpouring of support," Assistant Police Commissioner MichaelFuller told reporters.
On Wednesday, people were still laying flowers and signing condolence books in Martin Place, a pedestrian mall near the scene of the cafe siege.
Police also said they would be boosting their presence in prominent locations such as Sydney Harbour, home to the Opera House, for the next three weeks as an added precaution.
Iran's Foreign Ministry said it had warned Australia repeatedly about Monis, who fled Iran claiming persecution.
Recently introduced Australian legislation expanded the intelligence services' ability to access private computer networks, cracked down on the leaking of classified information and bolstered the cooperation of the domestic and foreign intelligence services.
The government is also introducing controversial data retention laws, although Abbott said on Tuesday it was unclear whether those laws, aimed at intercepting communications between individuals plotting attacks, would have helped to stop Monis.
Critics of the security laws, touted by Abbott's conservative government as necessary to prevent attacks such as the hostage crisis, have seized on the failure to argue against the granting of further powers.
"There's no control order regime to account for this. There's no metadata inside an apparently deranged mind," Fairfax News columnist Waleed Aly wrote.
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