The Australian Vice-Chancellors' Committee has warned that Australian higher education is in danger of "sliding into mediocrity" unless public funding is increased.
It called on the federal government for an injection of A$500 million (£181 million) into universities and further education every two years until public spending on higher education exceeds the current A$5 billion by A$1 billion.
The committee demanded changes to the government-regulated system to give universities greater autonomy. The AVCC said that while the government should set the broad parameters, individual institutions should have more control over their internal operations.
The committee, however, faces problems among its 37 members in reaching a consensus on the extent of deregulation.
Although the elite universities - the so-called Group of Eight -want total freedom to set student fee levels for both Australian and foreign students, not all AVCC members agree.
In a paper prepared for government consideration, the committee has opted for a "basket of funding options".
As well as an immediate increase in federal grants, these include providing a choice of funding options so that universities can decide their own student profiles, moving away from the current system of government-fixed enrolment targets.
Universities want the option of charging full fees along with a system of income-contingent loans.
The National Union of Students attacked the proposals and said that students would reject any further imposition of fees. Australian students already paid among the highest fees in the world, the NUS said.
NUS president Lisa Johnstone said: "Students are tired of hearing they should be responsible for the funding hole in higher education. Fees are wrong. They privilege wealthy students and they exclude the poor."
Ms Johnstone said that giving vice-chancellors the choice on how to fund their universities was deregulation.
The National Tertiary Education Union said the government should use its larger-than-expected A$4.3 billion surplus to re-invest in public education.
Cuts to education had had disastrous effects across the country, the union said.
NTEU president, Carolyn Allport, said: "Australia is swimming hard against the international tide by reducing public investment when most comparable nations have realised that education is the key to future prosperity."
Dr Allport said a suggestion by federal treasurer Peter Costello that the solution to Australia's "brain drain" was a further cut to tax levels was misinformed.
"It is the lack of investment in core educational infrastructure and the inability to deliver competitive salaries that is driving some of our best minds overseas. Far from solving the brain drain, further cuts in tax would worsen the problem," she added.