Israel and Iran began trading missile blows on Friday after the Israeli military launched attacks with the stated aim of wiping out Iran's nuclear and ballistic missile programs.
Iran vowed to "open the gates of hell" in retaliation, with the conflict continuing into Sunday.
Acting Prime Minister Richard Marles expressed concern that the bombing could escalate into a larger conflict in the region.
"We're all deeply concerned about the potential for where this now goes in terms of escalation and broadening out into a wider conflict, and that's why we are urging for diplomacy and dialogue in this moment," he told ABC Radio on Monday.
"That is why we are exercising our voice, along with countries like the United States, like France, Germany, the UK, to urge for diplomacy and dialogue."
The missile attacks are set to be a key focus of talks at the G7 summit in Canada, which Prime Minister Anthony Albanese is attending.
Iran's health ministry said 224 people have been killed in the attacks since Friday.
Spokesman Hossein Kermanpour said on social media that 1277 other people were hospitalised, and asserted that more than 90 per cent of the casualties were civilians.
Israeli rescue teams combed through the rubble of residential buildings destroyed by Iranian missiles on Sunday, using sniffer dogs and heavy excavators to look for survivors after at least 10 people, including children, were killed, raising the two-day toll to 13.
Mr Marles said Australian diplomatic staff in Iran and Israel have all been accounted for, as have military personnel in the region.
He reiterated safety warnings to Australians in the Middle East, with the situation remaining volatile.
"There are actually thousands of Australians who are in both Iran and Israel, the travel advice for both Israel and Iran right now is do not travel," he said.
"Our diplomats who are engaged, who are in both our embassies in Tehran and Tel Aviv, are safe and are all accounted for, but we will continue to monitor their safety."
Despite the calls for de-escalation, Liberal senator Andrew Bragg said Israel was doing the world a favour, given Iran is a state sponsor of terrorism.
"If we were in Israel's shoes, we would not tolerate a country nearby us getting a nuclear weapon," he told Today.
"And so I think Israel is trying to stop that from happening - that's a good thing for humanity, because these guys are the worst regime anywhere on the planet."
Mr Marles said Israel had a "right to self defence" following the attacks.
"We understand the risk that the Iranian nuclear and ballistic missile program represents, but right now the focus has to be on diplomacy and dialogue," he said.
