Hundreds of special forces troops are being recruited to strengthen Australia's fight against terrorism at home and abroad, the government has announced.

Prime Minister John Howard said he would create a new commando company and appoint a special forces commander to oversee counter-terrorism operations.

The new initiative will further increase Australia's ability to use non-conventional war-fighting means to respond to the threat of terrorism Prime Minister John Howard

Australia has been on high alert since the October bombing of a nightclub in Bali killed more than 180 people, including up to 90 Australians.

There have been threats of more attacks against Australians, but correspondents say the new commando force is also being seen as a sign that Canberra is gearing up for involvement in any Iraqi conflict.

Prime Minister John Howard said his government had been forced to reassess its ability to respond to terrorism after the Bali attacks.

New command

The new commando unit of 310 soldiers will supplement the existing Special Air Service (SAS) Regiment and there will also be a special operations command to handle any threat, he said.

"It will send a very potent signal to the Australian community and will in a very practical sense massively improve our capacity to deal with potential terrorist threats," Mr Howard said.

A national anti-terrorism exercise is planned for next year

The government plan includes logistics, weapons and communications support for the new commando company.

The purchase of more helicopters used to transport troops is also to be accelerated.

Mr Howard was criticised by other Asian leaders earlier this month after saying he would launch pre-emptive strikes outside Australia to stop terrorist threats against his own country.

Announcing the new anti-terrorism measure after welcoming SAS troops back to Perth from serving in Afghanistan, Mr Howard said the new initiative would increase Australia's ability to use "non-conventional war-fighting means".

While the prime minister focused on the fight against terrorism, correspondents say the new unit also raised speculation about Australian involvement in any future conflict in Iraq.

The US, leading calls for the disarming of Iraq, has asked its allies for military support and reports suggest that special forces would form the bulk of any Australian contribution.

Sydney tested

The announcement of the new commando unit coincided with a test of the counter-terrorism capabilities of Sydney's police and emergency services.

In the simulated threat, two armed "terrorists" holed up on the fourth floor of a seven-storey building in the inner-Sydney suburb of Alexandria and claimed to have a bomb.

Police tactical response units including the bomb squad joined fire brigade and ambulance officers responding to the attack.

New South Wales Premier Bob Carr said the simulation went well but it had revealed some flaws.

"It would be silly to indicate possible vulnerabilities in this exercise but the good thing is we know what to work on," he said.

Officials said a nationwide test of counter-terrorism capabilities would be held early next year.