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A terrorist attack on Australian soil - possibly initiated by a lone operator - is regarded as likely, prompting ASIO and the Australian Federal Police to shift the official risk assessment from medium to high.
It comes as Australia prepares to enter a new war in Iraq and Syria and as intelligence senior sources revealed the number of counter-terrorist investigations in Australia has increased by 600 per cent in the past 12 months.
There has also been a dramatic increase in the number of Australian passports cancelled as authorities deemed that certain people were looking to leave the country with intent to join the conflict.
Authorities are worried the jihadist war being waged in northern Iraq and Syria by the Islamic State of Iraq and the Levant has become a rallying point for disaffected youth, although the government denies that Australian participation will increase the risk of attack.
Australia's state of attack readiness sits one level below extreme, which applies only when an attack is thought to be imminent.
Prime Minister Tony Abbott announced the elevated level flanked by ASIO chief David Irvine, Attorney-General George Brandis and Australian Federal Police acting Commissioner Andrew Colvin.
"I want to stress at this time as I always do that nothing that I have said today or nothing that I ever say about national security threats has anything to do with religion. This is about crime, potential crime, and combating crime. That's what it's about," Mr Abbott said.
He was also keen to reassure Australians that no specific threat had been identified.
Australians are being warned to expect slower progress through air and sea ports and in gaining entry to large public events such as football finals because of increased security measures and a higher police presence.
Mr Irvine officially moved agencies onto the new footing on Thursday evening, acting on what Mr Abbott described as "an accumulation of indicators".
The new level reflects an increase in communication among possible jihadists with authorities certain of a clear increase in the level of intent by multiple persons to enact terrorist attacks within Australia.
Of specific concern is the growing danger posed by so-called "lone wolf" fanatics acting either on specific instructions from ISIL or like-minded groups, or entirely unilaterally.
"There are I regret to say people who would do us harm and some of them are Australian citizens," Mr Abbott said.
Mr Abbott made the public announcement from Melbourne before chairing a special meeting of the National Security Committee of Cabinet.
Earlier he had held a telephone hook-up with state premiers and chief ministers and communicated the change to the federal opposition.
Authorities recognise the gap between intent to do harm and the capability has shrunk as social media and the internet have become effective tools for radicalising and instructing would-be terrorists.
Opposition Leader Bill Shorten said the decision to raise the threat level was "most serious" but Australians would remain "smart and resilient".
"The PM and I are partners when it comes to matters of national security. We are in this together," he said.
Mr Shorten also dismissed the suggestion that Australia's involvement in any US military action in Iraq and Syria had deepened the terrorist risk.
"Australia would still be a target regardless of what we did in that region. Our way of life, our tolerant, diverse society, makes other people jealous and threatened by our very actions," he said.
Sources said the danger exercising the minds of security agencies was the combined effect of a detected rise in talk among those under surveillance and the likelihood that the Iraq-Syria conflagration could stoke further radical and violent intent.
Mr Abbott said it was not the government's decision to raise the threat level. "It's the experts' decision," he said.
Agencies said the extra level would not affect the planning of the ultra-high security G20 summit in Brisbane in November because that had been planned on the assumption of an increased threat level.
The government continues to warn of the express threat of Australian-born terrorists fighting with ISIL returning to the country with violent intent and the training to bring those plans to fruition.
There are about 60 Australians fighting there among about 8,000 foreign fighters, some of whom could also return to nearby countries such as Indonesia.
There have already been two Australians killed in suicide attacks and intelligence services say others could follow.
NSW Police Commissioner Andrew Scipione said Sydney was more at risk than other capitals because of its population size and "iconic infrastructure".
He asked the public to be vigilant, saying: "The greatest tool that a terrorist has is a complacent community and what we want is people not to be complacent."
Security may be beefed up in places of mass gathering, such as football finals, on public transport and around softer targets such as large shopping centres, he said.
"This shouldn't affect anyone in their daily lives. But of course, you will see extra activity," he said.
The National Security Hotline is 1800 123 400 and more information is available at www.nationalsecurity.gov.au.