Australia's leading spy agency has warned proposed laws designed to automatically strip citizenship from dual-national extremists could increase the risk of terrorism.

ASIO said excluding suspected terrorists from Australia would not eliminate the direct threat they posed or prevent their reach to inspire, encourage or direct attacks in the country.

The citizenship law came under close scrutiny in January after Home Affairs Minister Peter Dutton announced renowned Islamic State member Neil Prakash had been stripped of his Australian citizenship because he was also Fijian, only to have the Fijian government insist Prakash was not. Credit:Alex Ellinghausen

"In some instances, citizenship cessation will curtail the range of threat mitigation capabilities available to Australian authorities," the intelligence agency told a Senate committee investigating the legislation.

"It may also have unintended or unforeseen adverse security outcomes – potentially including reducing one manifestation of the terrorist threat while exacerbating another."