Ms Brodtmann told Parliament on Monday that foreign diplomatic missions should be allowed to move into commercial properties, houses and apartments around the capital, according to a report from the joint standing committee on the national capital and external territories.

The MP said the existing system for allocating land had no long-term strategy, lacked coherence and full co-operation between the National Capital Authority and the ACT government.

Ms Brodtmann had the inquiry established as part of her campaign against embassies at Yarralumla's Stirling Ridge.

She said on Monday that both she and the committee wanted to see Canberra allocate its embassy sites in similar ways to Washington DC.

"The committee was impressed with the level of planning and co-ordination in the Washington model and its substantial use of free market methods in its allocation of land to diplomatic missions," she told the chamber.

The law governing diplomatic building in the US capital, the Foreign Missions Act, "leaves the responsibility for identifying and acquiring sites for chanceries with the foreign governments under free market conditions with limited regulations depending upon the desired location".

Ms Brodtmann spoke of her concern about how diplomatic land was distributed under the current system.

"There was no long-term strategy or plan guiding the allocation of land for the development of diplomatic estates here in Canberra," she said.

"Instead there was an ad-hoc process that resulted in land being designated for diplomatic estates and then never being developed and new land, virgin ground such as Stirling Ridge, being proposed for development when the diplomatic estate wasn't full and in the absence of a long-term strategy."

The MP said the committee's recommendations would enhance and modernise the city's diplomatic quarters.

"I'm confident these recommendations will ensure that the future development of land for diplomatic estates will be done in a way that enhances this city and enhances the experience of diplomats posted to Canberra and that benefits all Canberrans.''