The alleged sex ring, known as The Ledger, involved members detailing their conquests on paper and placing dollar values on each female sailor they had sex with during an overseas deployment in May last year.
Chief of the Defence Force Angus Houston said he was very disappointed problems had been found in the initial administrative inquiry, which did not hand down any findings.
News of the latest problem at defence comes as the department battles continuing dilemmas elsewhere.
Earlier this week it was revealed the Chief of Army Ken Gillespie had become involved in the ongoing problems around pay and had been overpaid $20,000.
On top of that a Senate committee heard the trouble-plagued Collins class submarines were continuing to face maintenance dramas which left just one of the six ships available for operations.
Air Chief Marshal Houston said he regretted the need for a new inquiry into the allegations but said he was happy problems with the initial investigation had been identified.
"It is imperative that serious matters such as this are dealt with thoroughly, he said in a statement.
"Ensuring that my personnel behave appropriately, ashore and at sea, is fundamental to the cultural reform that I am driving," he said.
Stories on the Ledger were initially aired last year by the Seven Network.
It reported that larger amounts of cash were offered if the sailors could sleep with a female officer or a lesbian and sailors challenged each other to have sex in various locations, including on top of a pool table.
In announcing the inquiry, Defence Minister John Faulkner said a retired senior judge would be appointed to head the fresh investigation.
No details about who will lead the inquiry were given although retired High Court justice Michael Kirby is a possibility.
Senator Faulkner has declared the issue of navy culture to be one of his priorities.
Queensland Liberal and chair of the References Committee, Russell Trood, praised Senator Faulkner's willingness to fix the problem.
"We welcome your willingness to be transparent and open in this matter," Senator Trood said.
He went on to voice disappointment at the bias found in the original inquiry.
"This seems to me to be yet another indicator of the considerable process that is yet to be made in trying to incorporate a culture of fairness and justice within the Department of Defence.
The Ledger was discovered while HMAS Success was visiting Singapore.
At the time, the captain ordered the sailors involved to return to Australia immediately after they were formally interviewed.
Opposition defence spokesman David Johnston said the new inquiry was cold comfort for the three sailors, who have been separated from their ship and in limbo for nine months following the initial allegations against them.
"These senior sailors were hung out to dry, and their lawyer was consistently bullied and stonewalled over a period of nine months to bring us to this point," Senator Johnston said in a statement.
"This sorry episode may still have some way to go but I have to say confidence in our system of military justice has been seriously and severely damaged again."
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