"The purpose would be to ensure that people smugglers have no product to sell," she said during a speech in Sydney.
"A boat ride to Australia would just be a ticket back to the regional processing centre."
Sri Lankan suspension
Gillard added that a suspension on Sri Lankan asylum claims would end. It had been set to expire on Thursday, and she pledged that the cases of Sri Lankans currently in detention would be assessed.
A report released on Monday by the UN High Commissioner for Refugees said the situation in Sri Lanka had "greatly improved," with ethnic Tamils no longer in need of international protection after the end to the country's civil war.
But the body urged countries to assess refugee applications on a case-by-case basis.
Al Jazeera's Lisa Upton reporting from Sydney, said that Gillard also announced that Afghan asylum seekers would have to wait another three months for their claims to be processed.
Gillard's predecessor, Kevin Rudd, dumped an off-shore claim processing scheme for asylum seekers when he took office in 2007.
Asylum seeker 'influx'
Since then, more than 4,000 asylum seekers have entered Australian waters in nearly 150 boats, many of them Afghans and Sri Lankans who paid people-smugglers to ship them to Australia.
|More than 4,000 asylum seekers entered Australian waters since 2007 [AFP]
They have overflowed an offshore detention centre on Christmas Island in the Indian Ocean, and in recent months, detainees have been moved to the mainland for holding while their refugee applications are examined.
In April, Rudd's government attempted to reduce the flow by imposing a temporary suspension on processing asylum claims from Sri Lankans and Afghans.
The main opposition Liberal party have blamed the Labour government for encouraging "an influx" of illegal boat arrivals to the country.
The political rhetoric concerning immigration has increased ahead of the expected elections, and just hours before Gillard's Sydney speech, Liberal party leader Tony Abbot unveiled the opposition's refugee policy.
Abbott said his coalition would prioritise offshore refugee applicants, turn away incoming boats when possible and prevent asylum seekers from entering Australia if they were found to have deliberately discarded their identity documentation.
Concerns 'not racist'
He also reiterated his pledge to revive the so-called "Pacific solution" where the country paid impoverished island neighbours Nauru and Papua New Guinea to keep asylum seekers in detention centres, as well as imposing temporary protection visas.
Under the visas, the asylum seekers would have to prove after three years that they would still face persecution if they returned to their homelands.
Refugee advocates are highly critical of both parties' approach towards asylum seekers and some have accused Gillard of attempting to gain the support of "red necks" in the country's marginal seats.
She responded on Tuesday by saying that Australians who expressed concerns about illegal asylum seekers should not be labelled as racist.
"It is wrong to label people who have concerns about unauthorised arrivals as red necks. Of course there are racists in every country but expressing a desire for a clear and firm policy when you are faced with a difficult problem does not make you a racist," Gillard said.
Julian Burnside, a human rights lawyer in Australia, said the East Timor proposal is "a fairly skillful balance, attempting to please both sides of the argument. Each side gets a little but of comfort out of it".
"Overall, it may be a reasonable balance, but a great deal depends on the details of the regional processing solution that she mentioned," Burnside told Al Jazeera.
"Provided the processing is done fairly, provided there is a mechanism for an independent review of adverse decisions and provided people are treated decently while being processed then I think it is an approach that may be satisfactory."