Australia's military has been stretched by recent deployments
Australia's Prime Minister Kevin Rudd says that his country must be prepared to respond to an emerging arms race across the Asia-Pacific region.
The Australian military would be built up to meet the challenge, he said.
In a speech to retired soldiers, the prime minister did not spell out which countries could pose a threat in the future.
But analysts say planners in Canberra are wary of expanding armed forces in China, India, Indonesia and Malaysia.
Almost every nation in Asia has a territorial dispute of some kind with its neighbours, ranging from minor verbal jousts to potential triggers of conflict.
China's increasing confidence on the world stage is also reflected in continuing disputes over ownership of the resources of the South China Sea, including the current muscle-flexing between China and Vietnam over a disputed oil contract, correspondents say.
Without going into such specifics, Mr Rudd did say that existing tensions in the Asia-Pacific region were causing concern.
These included questions of sovereignty between China and Taiwan and other "unresolved flashpoints" arising from border disputes between other countries.
Mr Rudd said his government had to be aware of the changes that were taking place in the region and that Australia had to make sure it had a force that could "answer the call" if needed.
"There is an arms build-up across the Asia-Pacific region and Australia therefore must look at the long-term future at the same time as advancing our diplomacy," he told reporters.
Mr Rudd described the arms build-up as an "explosion".
"Militarily... as it has already become economically and politically, the Asia-Pacific will become a much more contested region," Mr Rudd said in the speech.
"The demographic changes in our region will mean that by 2020 when we look to our north, we will see a very different region to the one we see now, one where population, food, water and energy resource pressures will be great," Mr Rudd said.
Australia should, therefore, be preparing for "the new challenges of energy security and anticipating the impact of climate change on long-term food and water security," Mr Rudd said.
Australia has a relatively small military, which has been stretched in recent times by deployments in Iraq, Afghanistan, East Timor and the Solomon Islands, reports the BBC's Phil Mercer in Sydney.
A 10-year plan to modernise its combat capabilities is already under way, including the purchase of fighter aircraft, cruise missiles and helicopters, as well efforts to build a larger army.
Some analysts have described this as a "catching up" exercise, suggesting more investment would be necessary.
Mr Rudd appears to agree.
"For the government, a major priority is to ensure we have enough naval capabilities in the future, enough naval assets, enough naval performance, and therefore enough funding put aside to invest in that, long term," he said.
Mr Rudd also insisted in his speech that Australia, which is a close ally of the United States, wanted to maintain its status as a global "middle power".