Speaking to reporters Kevin Rudd, the Australian prime minister, said "an effective diplomatic solution" has become an absolute necessity after more than a week of violence in the Gaza Strip.
"Any diplomatic solution must find a way of bringing a halt to rocket attacks against Israel by the terrorist organisation Hamas," Rudd said.
"Any diplomatic solution must also involve an immediate cease-fire."
Rudd urged Israel to recognise basic human rights by opening the border crossings into Gaza.
He said Israel should also ensure that Palestinians have access to food, medical supplies and humanitarian assistance.
Israel maintains the offensive is aimed at stopping rocket fire from Hamas-controlled Gaza that have traumatised southern Israel.
More than a week of Israeli bombardment of Gaza has left over 500 Palestinians dead, at least a quarter of them civilians.
Thousands more have been wounded, a UN agency said.
On Sunday thousands of anti-Israel demonstrators marched through Sydney with banners displaying photos of the bloodied corpses of children, chanting "No more terror!".
|Rudd urged Israel to recognise the basic
human rights of the Palestinians [EPA]
Protesters also carried three mock coffins past the Egyptian consulate, shouting "Free, Free Palestine!".
In Melbourne there were separate rallies in support of and against the Israeli military offensive, but despite a large turnout police said there were no reports of trouble.
While the majority denounced the Gaza offensive, a smaller pro-Israel group defended the action as the right of the Jewish state to defend itself.
"On an almost daily basis, Israel has been subject to rocket attacks. Almost three thousand in 2008 alone," Senator Mitchell Fifield of Victoria's Liberal Party said.
Australia is home to around 340,000 Muslims, making up around 1.6 per cent of the country's 21 million population.