Overnight, Indonesia released Bali attacks bomb maker Umar Patek from prison on parole after serving little more than half his 20-year sentence.
The attacks killed 202 people, including 88 Australians.
Deputy Prime Minister Richard Marles said the news would bring a "difficult day" for Australians and families who lost loved ones in the Bali bombings.
He told ABC radio the government had advocated against Patek's early release and would urge the Indonesian government to ensure he had "constant surveillance" while on parole.
When asked what discussions had been held with the Indonesian government over Patek's release, Home Affairs Minister Clare O'Neil declined to go into detail.
"The Australian government has put in the strongest possible terms our views about what has occurred," she told the National Press Club on Thursday.
"We don't control the Indonesian justice system and that that is the way of the world ... Australians should be thinking today of those families and communities.
"It was a complete tragedy."
A spokeswoman for the Department of Foreign Affairs and Trade said the department had registered concerns about Patek's release on multiple occasions with the Indonesian government.
"Many Australians will be deeply hurt by the release of Umar Patek," the spokeswoman said on Thursday.
"Today our thoughts are with the victims and survivors of the Bali bombings and their families."
While the spokeswoman said Patek's release was a matter for Indonesia, the department indicated Patek will still be observed upon his release.
"We have sought assurances from the Indonesian government that he will be subject to ongoing supervision and monitoring, in accordance with Indonesia's approach to deradicalisation," she said.
"Australia condemns acts of terrorism and those who perpetrate violence on innocent victims, and will continue to work closely with the Indonesian government on counter-terrorism cooperation."
Cabinet minister Chris Bowen said the development was concerning but the government respected Indonesia's legal system.
"Indonesians and Australians were killed by these terrible murders, Indonesians and Australians went through this terrible ordeal together," he told ABC News.
Indonesian authorities have said Patek was successfully reformed in prison and they will use him to influence other militants to turn away from terrorism.
Bombing survivor Peter Hughes from Perth, who gave evidence at Patek's trial, said he and other survivors were sceptical the bomber was a changed man.
"There is a history of people like him, they won't stop. For him to be let out is laughable," Mr Hughes told the ABC.
Fellow survivor Jan Laczynski, from Melbourne, said he was shocked and appalled at Patek's release.
"I still can't understand how this person that created so much loss of life and not just for 88 Australians - 202 people - could be walking free this morning," he told Nine's Today Show.
Patek was a leading member of Jemaah Islamiah, which was blamed for the blasts at two nightclubs in Kuta Beach.
He was found guilty by the West Jakarta District Court of helping build a car bomb that was detonated by another person outside the Sari Club in Kuta on the night of October 12, 2002.
With Associated Press
