Zomi Frankcom was killed in an attack on an aid convoy in April 2024 while helping people in Gaza.
The Israeli military announced overnight it had found there was no suspicion of criminal misconduct surrounding the Australian's death and would not look into it further.
That led to Israel's ambassador being summoned to Parliament House for a diplomatic dressing down on Thursday.
Prime Minister Anthony Albanese said Israel had fallen short of the accountability required.
"Israel's decision to close their investigation without criminal proceedings is an outrage," he told parliament on Thursday.
"The Australian government will not stop pressing Israel for justice for Ms Frankcom and her colleagues.''
Foreign Minister Penny Wong condemned the actions of Israel, while saying the countries would maintain ties.
"We maintain those relationships because they enable us to engage in order to advance Australia's interests," Senator Wong told reporters.
Ms Frankcom's family deserved an apology from Israel at a minimum, Senator Wong said, but she ruled out expelling Israeli ambassador Hillel Newman from Australia despite mounting pressure to do so.
"I deal with Ambassador Hillel as a representative of the government of Israel," she said, after summoning him to Parliament House.
"Removing an ambassador will remove our ability to be able to engage and press for Australia's interests."
Dr Newman told reporters on Thursday that Israel was sorry for the humanitarian worker's death.
"We express deep sorrow and grief with the family of Zomi Frankcom, and I'd like to tell them straightforward: we grieve with you," he told reporters.
Dr Newman said the aid convoy decided to put armed personnel on it without telling Israel, and deviated from the pre-approved route.
"One cannot attack findings of a court if the findings are not suitable to one's political agenda," he said.
"The findings of the court came to the conclusion after two years of independent research that there's no criminal liability. We must respect that, as we do in every case of a investigation."
The Israeli ambassador was driven in through the back entrance to parliament as part of a convoy of black cars.
He said mistakes were made by both the aid convoy and the Israeli military.
Dr Newman declined to apologise for Ms Frankcom's death on behalf of Israel, saying it could imply criminal responsibility.
He didn't rule out a potential appeal of Israel's decision.
Israel's military announced it had completed reviews of 150 cases of troop conduct in Gaza and made decisions on five cases, including the attack that killed Ms Frankcom.
There was "no reasonable suspicion of criminal misconduct that would justify the opening of a criminal investigation", the statement read.
Senator Wong said the Israeli government's decision not to pursue criminal proceedings against those responsible for killing the Australian and her World Central Kitchen colleagues fell "far short of the accountability we expect".
"(I) have directed Australia's ambassador to Israel to convey our views directly to Israel as the Australian government considers next steps," she said.
"The Australian government will not stop pressing Israel for justice for Zomi and her colleagues."
The World Central Kitchen convoy was marked as supplying aid when it was struck in Khan Younis, southern Gaza.
The Israeli military initially claimed the convoy was being used by Hamas, before later acknowledging it had been misidentified and admitting errors in the decision-making process before the attack.
Two Israeli officers were dismissed from their positions and three senior officers were formally reprimanded, according to the Israel Defense Forces.
In a statement, World Central Kitchen said it fundamentally disagreed with the Israeli military prosecutor's decision about a criminal investigation into the IDF airstrikes that killed its team.
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