Australia faces a brutal, century-long war against radical Islamists that will be fought at home and overseas, a former army chief warned this week.

Just days after Lieutenant-General Peter Leahy, who was chief of the Australian Army from 2002-2008, issued this grim warning, a photo was released on Twitter showing a young Sydney-born boy posing with the severed head of an executed soldier in Syria.

It shocked the nation and sparked international headlines, triggering a chorus of condemnation against the boy and his father, believed to be convicted terrorist Khaled Sharrouf.

Mr Leahy, who is now director of the National Security Institute at the University of Canberra, said the gruesome image vindicated his warning.

"The vast majority of Muslims would be completely horrified by this," Mr Leahy was quoted as saying in the Australian newspaper. "The only solution has to come from within Islam… Their leaders must speak up and publicly condemn this behaviour."

Muslim leaders have condemned the photo of Mr Sharrouf and his son, who slipped out the country last December. NSW Islamic Council head Khaled Sukkarieh said the image was outrageous. "To see photos of a seven-year-old being subjected to this kind of rubbish; we condemn it all in the name of Islam," he said.

But most Muslim leaders declined to comment on Islamic State, the jihadist group otherwise known as Isis that promotes a Muslim caliphate across swathes of Iraq and Syria.

The backlash against the photo came days after a gang of drunken youths boarded a bus full of young Jewish students in Sydney, allegedly threatening to slit their throats. Police are still investigating the minors.

Mr Leahy warned that Australia was not properly prepared for a long war against radical Islam.

"Australia is involved in the early stages of a war which is likely to last for the rest of the century," he was quoted as saying. The threat of radical Islamism will require "the expenditure of blood and treasure", he added.

"It will, of necessity, restrict our rights and liberties."

His warning came days after the government proposed new data laws mandating phone and internet companies to retain records for two years in a bid to help intelligence agencies prevent domestic terrorist attacks.

Last Friday, David Irvine, the head of Australia's spy agency, described the threat level as "medium", meaning a terrorism "event" in Australia was likely.

The nation's top spy chief last month expressed concern about "tens" of former Australian jihadists who have returned from the Middle East.

"We've even had bomb plots here in Australia and thanks to police and intelligence agencies, have been able to stop those threats," Mr Leahy said. "But terrorists only have to be lucky once."