The Government has approved $8million for Thales to develop a prototype for a better rifle for the Army.
Defence Materiel Minister Jason Clare said the work would be carried out at Lithgow's Soldier Systems Centre - once known as the Lithgow Small Arms Factory.
The prototype would have better balance, weigh less and include an integrated grenade launcher.
It would retain the Austeyr's most controversial characteristic, its 5.56mm (.223 inch) calibre. The smaller projectiles don't carry as far as the 7.62mm weapons favoured by insurgents in Afghanistan and elsewhere.
Australian special forces troops, who have considerable latitude in their choice of weaponry, generally go for heavier guns.
The advantage of the Austeyr, which uses plastic extensively, over older designs such as SLRs and M16s, is its light weight.
A Defence spokeswoman said the improved design would include NATO standard rails to allow the use of a wide range of ''off the shelf'' attachments that tailor the rifle for specific missions.
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