The image was posted on Twitter and showed the boy, believed to be the son of Sydney jihadist Khaled Sharrouf, The Australian newspaper said, adding that the boy was aged seven.
The image was taken in the northern Syrian city of Raqqa and was posted last week on the Twitter account of Sharrouf, Australia’s most wanted terrorist who fled to Syria last year and is now an Islamist State fighter.
“That’s my boy!” Sharrouf apparently posted beneath the image.
Abbott said the photograph was “more evidence of just how barbaric this entity is”.
The photo was “pretty graphic evidence of the real threat that ISIL represents,” said US defence secretary Chuck Hagel, in Sydney ahead of annual Australia-United States Ministerial Consultations (AUSMIN).
The Australian government believes at least 150 of its citizens are involved in fighting or actively supporting the Islamic State (ISIL) in Syria and Iraq.
It said last month it was putting Islamic State on its list of banned terrorist organisations.
The United States is exploring options to evacuate thousands of Iraqi civilians trapped by Islamic militants on a barren mountain in northern Iraq, after humanitarian relief airdrops, US officials said.
While the airdrops appear to have provided urgently-needed aid, the harsh conditions of the Sinjar mountain range in mid-summer have taken scores of lives among Iraq’s Yazidi minority, who are threatened by hardline militants from the Islamic State.
Australia, along with France and Britain, has offered assistance to provide aid to the trapped people.
Sharrouf used his brother’s passport to leave Australia last year with his wife and three sons to fight in Syria and Iraq.
The Australian government had banned him from leaving the country because of the terrorism threat he posed.
He was among nine Muslim men accused in 2007 of stockpiling bomb-making materials and plotting terrorist attacks in Australia’s largest cities, Sydney and Melbourne.
He pleaded guilty to terrorism offences and was sentenced in 2009 to four years in prison.
Australian police announced last month that they had arrest warrants for Sharrouf and his companion Mohamed Elomar, another former Sydney resident, for “terrorism-related activity.”
They will be arrested if they return to Australia.
The warrants followed photographs being posted on Sharrouf’s Twitter account showing Elomar smiling and holding the severed heads of two Syrian soldiers.
In June, The Australian newspaper published a photograph of Sharrouf posing among the bodies of massacred Iraqis.
Abbott, who yesterday was in the Netherlands, said he expected Australian C-130 Hercules and C-17 Globemaster military transport planes would join multinational humanitarian efforts this week on Iraq’s Sinjar Mountain.
British officials estimated 150,000 people could be trapped on the mountain, where they fled in order to escape the Islamic extremists, only to become stranded there with few supplies.
Abbott told ABC: “This is a potential humanitarian catastrophe.”
He said Islam State’s quest for a terrorist nation posed “extraordinary problems” for the Middle East and the wider world.