Ministers have warned they will take action against any school where there is "inappropriate teaching or antisocial behaviour" and that schools must teach traditional Australian values.
The warnings were made as Prime Minister John Howard announced he would meet with state and territory leaders to consider tougher laws against inciting terrorism.
This follows a series of comments by Australian Muslims praising al-Qaeda leader Osama bin Laden as a good man, and supporting the Islamic jihad being waged on the West.
The Australian Federation of Islamic Councils said that young Muslims were vulnerable to visiting imams and religious scholars. Council president Ameer Ali said extremists posed a problem for impressionable youth.
More than a dozen privately-run Islamic colleges are operating in New South Wales and Victoria, where most of Australia's Muslims live. The schools receive public subsidies from state and federal governments.
Former teachers at some of the schools claimed that visiting imams had vilified Jews and attacked Christian beliefs. Females at the schools were also discriminated against, teachers said.
One of the schools, the Werribee Islamic College in Melbourne, confirmed that male and female teachers were separated to "prevent sexual harassment" and for religious reasons.
Non-Muslim women teachers were also required to wear a hijab (headscarf) and abaya (long dress jacket) once they entered the school premises.
The college was accused of using public money to build an offshoot in Jakarta and an orphanage school in Banda Aceh as part of an international expansion programme. But the principal said the money had been raised from donations.
Victoria's acting education minister, Jacinta Allan, said all schools in the state had to conform with Australian laws relating to equal opportunity and racial vilification.
Ms Allan said it was a fundamental tenet of society that there be equality between the sexes in schools at all levels and equal access to facilities and opportunities.
"Any school breaking the law will be prosecuted in the same way as any other institution or individual," she said.