Inquiry head, former judge Terence Cole, requested that the government expand the probe so he could investigate the dealings of mining giant BHP Billiton in Iraq.
However Mr Cole did not ask to expand his rights to question the government's involvement, saying he was confident the inquiry's terms of reference allowed him to probe Australia's Department of Foreign Affairs and Trade.
Mr Cole indicated however that the current scope of the inquiry did not allow him to make findings of illegality against the Federal Government or its staff.
He warned if he uncovered any illegal activity by the government he would ask Attorney-General Philip Ruddock to give him extra powers.
BHP Billiton investigation
Mr Cole said it was appropriate that he request permission to investigate "BHP Billiton Limited and its associated companies, and Tigris Petroleum Corporation," over a multi-million dollar wheat shipment funded by BHP a decade ago.
"The original transaction preceded the United Nations oil-for-food programme. However, there is material before this inquiry which suggests that the original transaction in 1995-6 might have been in breach of United Nations sanctions," Mr Cole told the inquiry.
BHP Billiton said it would cooperate fully with the inquiry.
Canadian warning
The inquiry also heard that the Australian government failed to investigate a warning from Canada five years ago that wheat exporter AWB was paying kickbacks to Iraqi dictator Saddam Hussein's government.
In January 2000, a UN customs expert warned Australia's UN mission in New York that the Iraqi government was demanding around $A930,230 from the Canadian Wheat Board to cover suspect trucking fees in Iraq, and that AWB was already paying such fees.
But DFAT accepted an assurance from AWB that there was nothing irregular in its deals with Iraq under the UN oil-for food program and took no further action.
Government reaction
Prime Minister John Howard rejected allegations that his government, which controlled AWB until mid-1999, knew about any illegal payments in Iraq.
"I did not know, my ministers did not know and on the information that I have been provided and the advice that I have received from the Department of Foreign Affairs and Trade, I do not believe that the department knew that AWB was involved in the payment of bribes," he told commercial television.
"We frankly believed all along that AWB was an organisation of complete integrity."
Mr Howard said he, his ministers and department officials were prepared to appear before the inquiry if asked to do so.
Foreign Minister Alexander Downer also stressed that his department was not aware of the alleged bribes.
"I am convinced that no-one in my department knew that AWB was paying kickbacks," he told Sky News.