Attorney-General Philip Ruddock said there was not enough evidence to justify using anti-terrorism laws to outlaw Hizb-u-Tahrir.
To be proscribed as a terrorist organisation, a group has to urge the use of force or violence.
"Evidence to sustain that has to be available," he told reporters.
"Just because people have messages that I don't regard as broadly in keeping with Australian values doesn't mean they can be proscribed as terrorist organisations," Mr Ruddock told reporters.
At the same time Jewish leaders in NSW have condemned a radical Muslim group that has sparked outrage by bringing to Australia its calls for an Islamic superstate.
Indonesian firebrand cleric Ismail Yusanto outlined his vision for an Islamic utopia before a crowd of about 500 Muslims at Lakemba, in Sydney's south-west.
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