Police in Pakistan's capital Islamabad have arrested a man over the murder of an Australian-Pakistani family.

According to police, Sikander Zia, the family's nephew, has confessed to the crime.

Amir Ullah Khan, his wife Nadia, and three children - sons Adam and seven-year-old Haider, and daughter Roman - were killed in Islamabad last week.

It is alleged Sikander Zia hired a gang of assassins to carry out the murders of Australian-Pakistani family. ( Supplied )

Police say their bodies were dumped at two different locations across the city.

Local reports said they had been strangled.

The family had lived in Australia earlier this decade, and were dual citizens.

The body of their servant was also found.

It is alleged Sikander Zia hired a gang of assassins to carry out the murders because he wanted to take control of the family's land holdings.

Family friends in shock at news of deaths

The Ullah Khan family lived in the Melbourne suburb of Glen Waverly from 2000 to 2005.

A friend of the murdered family, who wants to be known by his tribal name, Afridi, says Aamir decided the family would return to Pakistan because he was unable to find work in Australia.

Afridi says he and his family are having trouble coming to terms with the tragedy.

"My wife suddenly starts crying and screaming, same me, we are not accepting this news," he said.

He says he is also sickened at reports seven-year-old Haider was the last to be killed.

"He was very cheeky, very naughty," he said.

The Department of Foreign Affairs and Trade says the High Commission in Pakistan is working with authorities in Pakistan, who have commenced an investigation.

Its travel advice also recommends Australians reconsider their need to travel to Pakistan.