The Sydney siege gunman was not on any government terror watch lists despite having a long criminal history, mental instability and an "infatuation with extremism", Prime Minister Tony Abbott says.

Speaking in Sydney on Tuesday after laying flowers at a spontaneous memorial for the victims at Martin Place, Mr Abbott said Monis was well known to federal and NSW police and ASIO, but "I don't believe that he was on a terror watch list".

"If I can be candid with you, that is the question that we were asking ourselves around the national security committee of the cabinet today," Mr Abbott said.

"How can someone who has had such a long and chequered history, not be on the appropriate watch lists, and how can someone like that be entirely at large in the community?"

He said the federal government had acted upon hearing "terrorist chatter of acts of random violence against Australian citizens", such as upgrading security at Parliament House in Canberra and raising the terror alert.

"But … we do have to ask ourselves the question, could [the Martin Place incident] have been been prevented?"

Mr Abbott said even if the "sick and disturbed individual" had been on the terror watch lists and monitored 24 hours a day, the tragedy may not have been prevented.

"It's quite likely, certainly possible, that this incident could have taken place, because the level of control that would be necessary to prevent people from going about their daily life, would be very, very high indeed," he said.

As Fairfax Media has reported, Monis was released from custody on bail six days after controversial changes to the state's bail laws came into effect in May.

The laws made it easier for an accused person to be bailed if there is no perceived risk to the community.

The NSW government has since tightened the laws, which are due to take effect in late January. On Tuesday, Premier Mike Baird indicated that the rules may be tightened further following a state and federal investigation into how Monis slipped through the net of the judicial system.

"We are all outraged that this guy was on the street … the community has every right to feel upset. I'm incredibly upset," he said.

"Can we do it better? That's exactly what we are working with the Federal Government [on] over the coming weeks."

Mr Baird expressed condolences to the families of the two victims, barrister Katrina Dawson and Lindt café manager Tori Johnson.

"These were decent, good people, who were going about their ordinary lives. It's about as innocent a thing as anyone can do to go and grab a cup of coffee before the working day has fully started," he said.

He thanked the people of Sydney for their united response to the tragedy, including the floral tributes in Martin Place.

"This city is amazing. Its people are incredible, and what you are seeing in Martin Place right now as it unfolds, it is almost as if a beating heart of the city is being put in place," he said.

"That's what those flowers represent to me. It is showing us that this city is alive… it is people saying they care."