A Sydney jihadi wanted on terrorism offences has issued an extraordinary statement, threatening a terrorist attack on Australian soil and claiming he would have carried out one, had he not left for the battlefields in Syria and Iraq last year.

Khaled Sharrouf sent Fairfax Media his first lengthy and revealing diatribe from the frontline in Iraq only days after police issued a warrant for his arrest for suspected terrorist activity.

The 31-year-old, who escaped to the Middle East on his brother's passport, has demanded the release of 12 Muslim prisoners and claimed he played the Australian Security Intelligence Organisation and police for fools while he was under surveillance.

Terrorism experts and authorities have cast serious doubt on the seriousness of Mr Sharrouf's threats but say he has a tight social media network of followers who may be swayed by his extremist rhetoric.

Mr Sharrouf told Fairfax Media he had been "on the path they (sic) hate" since he was 19 and was inspired to join the jihad because of constant harassment by police and intelligence authorities, and the West's murderous activities.

He criticised the government's hypocrisy in allowing Jews to fight for the Israeli Defence Force while banning Muslims from fighting in the Syrian or Iraqi conflicts.

"They fight us and harm us we will retaliate we will dedicate our lives to your unrest," he wrote. "We r not mad men or dysfunctional as they portray us to be [sic]. By Allah, we are the sane. Anyone who sees what is happening to the muslims around the world ... and sits back and does nothing, he is insane."

He has demanded the release of 12 prisoners, including Hyde Park rioter Ahmed Elomar; murderer and Muslim convert Leith Marchant, and five men found guilty of planning a terrorism attack in Sydney.

"Tell them that if they don't leave my sister's alone and release my brother's (sic) ... they will be attacked and tell them dont worry about thinking who or from where cause they will never know," he said.

A senior police source said Mr Sharrouf was a "prolific liar" and the chances of negotiating with him were nil. "He talks a good talk ... but he's not a leader, by any stretch of the imagination," he said.

Greg Barton, a researcher at the Global Terrorism Research Centre at Monash University, said Mr Sharrouf did not have the capability to carry out a terrorist attack but he had "strong intent" nonetheless.

"I don't think we can talk about empty rhetoric any more, given where he is and what he's doing," Dr Barton said. "He may not be able to carry out much by way of planning or execution, but by becoming a bit of a hero on social media it can be more effective."

Dr Barton said the murder, in broad daylight, of British soldier Lee Rigby in London last year, showed that terrorists did not need brilliance to be dangerous.

Adam Dolnik, an international professor of terrorism studies at the University of Wollongong, said Mr Sharrouf was full of bravado but his threats were "weak and vague".

"He's taunting the authorities from a safe distance. There seems to be no expectation of ever returning to Australia, let alone to carry out an attack here," he said.

Muslim leader Keysar Trad said Mr Sharrouf had picked up on grievances that many Muslims felt strongly about, such as the killing of Palestinians in Gaza and civilians in Afghanistan, but he was doing nothing to help by "killing fellow Muslims" in Iraq.

After serving a four-year sentence for his role in the Pendennis terrorism plot, Mr Sharrouf became a debt collector and claims he fooled authorities into believing he was not a jihadi. A court found he was diagnosed with depression in 1999 and schizophrenia in 2002, a fact he disputes.

"Let them know that I played the government there like ignorant children i was never mentally ill not then nor now [sic]," he wrote. "I seen them following me and I was working for Allah right underneath there noses."

He sent new photographs from the battleground, along with his statement, which was verified by sources close to him. Federal and NSW Police declined to comment.

The statement came as federal Attorney-General George Brandis defended tougher national security and spying laws designed to thwart home-grown terrorism.

"Anybody who thinks there aren't people in the West, including in Australia, who are committed to this course of action I'm afraid is delusional," he told ABC Radio.

Police have issued warrants for the arrests of Mr Sharrouf and Mr Elomar, who posted images last week holding severed heads and who are believed to be fighting with the al-Qaeda linked Islamic State of Iraq and Syria.

Federal police have reassured the public that it is working closely with intelligence agencies to mitigate the threat of terrorism. “The safety of all Australians in the AFP’s highest priority," a spokesman said.