About 20,000 people gathered in Sydney's southwest to mark Eid al-Adha, which also celebrates the end of the annual pilgrimage, known as hajj, to Mecca.
The security presence had been strengthened for today's events after the mosque was among a number to receive threats in the wake of recent anti-terrorism raids.
Members of government, opposition and Muslim community leaders at Sydney's Lakemba Mosque called for a strengthening of community trust.
Opposition leader Bill Shorten used his speech at the event to urge all Australians to stand up against bigots and racists in the wake of divisive debate about the burqa in parliament.
"In Australia, the very least we can do to complement the efforts of our troops overseas is on behalf of our community to stand up against sectarian idiots, bigots, people who would seek to put prejudiced views and call them mainstream," he said.
"I'm not singling individuals out, but what I will say to politicians - whereever they are please do not be headline hunters by engaging in the dimunation of people's customs and cultures.
"People who come to Australia should leave their conflicts behind. We have one set of laws in Australia, but also as a nation, our values are to value diversity."
Samier Dandan, president of the Lebanese Muslim Association, said Australians needed to renew efforts to rebuild trust with each other, saying Islam is "being held hostage" by zealots.
Immigration Scott Morrison said the Eid Al-Adha celebration is a reminder of the need to celebrate peace and freedom.
"We also come together as Australians to remember those who are a long, long way from here today," he told the 20,000 people gathered at Lakemba Mosque to mark one of Islam's biggest festivals.
"Australian Defence Forces on all of our behalfs today and in weeks and months ahead will represent all of us who will seek to restore peace and freedom to those who have had it taken away.
"So it is important that as a community of faith that we celebrate peace; and all of those who seek to have that peace restored all around the world but particuarly in the Middle East."
Labor, Liberal united against terrorism: Shorten
Mr Shorten has reiterated Labor's support for Australia's mission in Iraq against Islamic State targets.
On Friday, the federal government approved the decision to send in Super Hornets as part of a US led mission.
He said when it comes to fighting terror, Labor and Liberal parties are all on the same side.
"The ultimate solution to the conflict in the Middle East needs to be dictated by Iraq and by the nations of the Middle East. But it is important for nations of good conscience, such as Australia, do their bit to stand up for the vulnerable everywhere."
He said Australia's mission in Iraq is driven by the humanitarian objective to protect civilians from violence.
Meanwhile, the US has praised Australia over its decision to join air strikes in Iraq and to send military trainers to the country.
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