The conservative leader announced the move Tuesday with ministers revealing he went straight to Britain's Queen Elizabeth II, Australia's head of state, for approval without consulting his Liberal Party.
Opposition Labor lawmakers ridiculed the move, asking why he was not focusing on important issues such as health and unemployment instead.
"I'm concerned the Abbott government thinks this is a priority," Labor leader Bill Shorten said. He later told the National Press Club: "Are we in a time warp?"
"As sure as knight follows dame, you know that Tony Abbott's going to take us back to the good old days," he told reporters.
The Australian Republican Movement was equally dismissive, saying its website nearly crashed today from the flood of new members signing up.
"This is turning the clock back to a colonial frame of mind that we have outgrown as a nation," said its national director David Morris.
"Our identity today is Australian, so our national honours should be thoroughly Australian."
Ahead of elections last September, state broadcaster ABC asked more than 1.4 million people their views and found 38 per cent in favour of cutting ties to the British monarchy while 20 per cent were neutral.
"I believe this is an important grace note in our national life," he said. "This is for pre-eminent achievement."
The titles will go to people who have accepted public office rather than sought it, although Abbott would not rule out politicians being knighted.
A campaign was underway today for cricketer Shane Warne to become a 'Sir', but Abbott played down the chances.
"Look, he's a terrific cricketer but I don't think we're going to see Sir Shane any time soon," the prime minister told the Seven Network.
Only 12 Australian knights and two dames have ever been appointed.
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