Deputy opposition leader Julie Bishop says Australia's security agencies engage in passport forgery - the very practice that prompted the Rudd Government to expel an Israeli diplomat.

Ms Bishop became embroiled in the fake passports scandal after calling yesterday's expulsion “an over-reaction”.

She told Fairfax Media: “It would be naive to think that Israel is the only country in the world that has used forged passports, including Australian passports, for security operations.”

When asked directly if Australian intelligence agencies forge passports, Ms Bishop – a former cabinet minister in the Howard government – replied “yes”.