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People born in Australia could also lose some privileges if they broke anti-terror laws, he added.
Officials have warned that the country faces a growing security threat from radical Islamists.
Dozens of Australian nationals are thought to be fighting for Islamic State (IS) militants in Iraq and Syria.
Experts are worried about the effect of returnees - and on those who support them - on domestic security.
"It has long been the case that people who fight against Australia forfeit their citizenship," Mr Abbott said in a speech at the federal police headquarters in the capital, Canberra.
"So Australians who take up arms with terrorist groups, especially while Australian military personnel are engaged in Afghanistan and Iraq, have sided against our country. And should be treated accordingly," he said.
For dual nationals, that meant revoking or suspending citizenship, he said, and the government was also looking at measures targeting Australian nationals involved in terrorism.
"These could include restricting the ability to leave or return to Australia, and access to consular services overseas, as well as access to welfare payments."
Mr Abbott stressed that the new legislation would also target "hate preachers", referring to groups that incited religious or racial hatred.
"Organisations and individuals blatantly spreading discord and division - such as Hizb ut-Tahrir - should not do so with impunity," he said.
In his speech, the prime minister said that a new security tsar would be appointed soon.
Opposition leader Bill Shorten said he would "engage constructively" with the government over the new measures, but cautioned against rushing through the proposals.
"Haste and confusion is never the friend of good, sensible security in the future," he was quoted as saying by Australia's ABC public broadcaster.
'Monster loose' Mr Abbott's announcement came a day after a report into December's Sydney cafe siege was released.
Two hostages were killed when self-styled cleric Man Haron Monis seized control of the Lindt café.
No direct links have been found between the gunman, who was killed when police stormed the cafe, and IS.
But the Iranian-born refugee, who was well-known to police, asked for an IS flag during the course of the siege.
The report said Australia's security hotline had received 18 calls about Monis just before the siege - but none suggested an imminent attack.
"We don't believe that at any particular decision-making point, grievous errors were made, but the totality of decision-making let this monster loose in our community," Mr Abbott said.
He warned that Australia would have to reconsider where the line was between individual freedoms and the safety of the community.
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