18-year-old radical Bourhan Hraichie had been placed in the same cell as the veteran at the Mid-North Coast Correctional Centre near Kempsey, New South Wales (NSW).
The teenager allegedly used a sharp object to carve "e4e" into the head of the ex-soldier, who served in East Timor, inside the jail on Thursday. The carving that read 'e4e' was apparently a reference to the terror group's "eye for an eye, tooth for a tooth" mantra.
The 40-year-old victim was reported to be fighting for his life, but is now "close to being released back to a correctional centre", the Department of Corrective Services said.
Hraichie was a known supporter of the terrorist group and had been previously caught sending graphic images of beheadings via internal mail to other ISIS extremists housed in Goulburn's Supermax prison, senior prison sources were quoted as saying by The Daily Telegraph.
"It is alleged an argument began over religious beliefs between the two, resulting in the 18-year-old carving letters into the front and rear of the 40-year-old male victim's head, before pouring hot water through a towel placed onto the victim's face," police said in a statement.
The younger man then alerted prison staff, who called paramedics, police said.
The teenager should have been placed in a high-risk management correctional centre and has now been transferred to one, Severin said.
The former soldier was taken to Port Macquarie Base Hospital with significant wounds to his neck, head and face, and a broken sternum. He was put in an induced coma, police told Fairfax Media.
A full investigation into the management of radicalised prisoners will also be launched.
Corrections Minister David Elliott said he was outraged by the alleged attack.
The charged teenager will face Kempsey Local Court on May 23.
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