In a clip posted to social media and captioned "Welcome to Israel", national security minister Itamar Ben-Gvir is shown hurling abuse at the activists - who had been detained after trying to sail to Gaza with aid - while their hands were tied behind their backs and faces on the ground.
"They came with a lot of pride like great heroes. Now look at them. See how they look now. Not heroes, terror supporters," he says at one point, according to a translation by CNN.
More than 400 activists, including 11 Australians, had been trying to break Israel's maritime blockade of Gaza when their boats were intercepted and boarded by the Israeli Defence Forces off the coast of Turkey.
Foreign Minister Penny Wong had asked Australia's ambassador to make a complaint to Israeli officials.
"The images we have seen are shocking and unacceptable," she said in a statement.
"We condemn the actions of Israeli Minister Ben-Gvir - who Australia has sanctioned - and the degrading actions of Israeli authorities towards those detained."
Among those detained by Israel are 11 Australians who were part of the Global Sumud Flotilla.
Head of the flotilla's Australian delegation Simon Jones said the federal government needed to haul in the Israeli ambassador to explain the minister's actions, or expel him from the country.
Israel's Prime Minister Benjamin Netanyahu scolded Mr Ben-Gvir for his actions and said the activists would be deported as soon as possible.
"Israel has every right to prevent provocative flotillas of Hamas terrorist supporters from entering our territorial waters and reaching Gaza," Mr Netanyahu said in a statement.
"However, the way that Minister Ben Gvir dealt with the flotilla activists is not in line with Israel's values and norms."
Israel's foreign minister Gideon Sa'ar also condemned his colleague, accusing him of undoing the work of the IDF and foreign ministry staff.
"You knowingly caused harm to our State in this disgraceful display - and not for the first time," he said.
"No, you are not the face of Israel."
Other countries, including Italy, the UK, Turkey, Greece and the US, have also criticised Mr Ben-Gvir.
American ambassador to Israel Mike Huckabee described Mr Ben-Gvir's actions as "despicable" and said he "betrayed (the) dignity of his nation".
