Foreign Minister Julie Bishop says IS is recruiting highly-trained technicians and scientists to make chemical weapons and has used chlorine in an attack in Iraq.
- Video calls for jihad in Balkans on eve of pope's visit
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- IS advances on key Syrian city despite regime air raids
She said it was likely that IS had Western-trained experts able to further refine precursor materials and build chemical weapons, reports the Australian newspaper.
Ms Bishop said: "The use of chlorine by Daesh (IS), and its recruitment of highly technically trained professionals, including from the West, have revealed far more serious efforts in chemical weapons development."
The disturbing news comes as a video was released by jihadists calling for terrorist acts to be carried out in the Balkans on the eve of a visit by Pope Francis to Sarajevo.
The video does not make any reference to the pope's visit and it was not possible to determine when and where it was recorded.
The video features a dozen jihadists presented as being from Albania, Bosnia and Kosovo. Some of them speak in Bosnian and Albanian, and they wear hats and gloves.
It was not the first video in which Islamists from the Balkans have called for jihad, but its impact was amplified by the proximity to the pontiff's visit.
In the video a Kosovo Albanian, introduced as Abu Muqatil Al-Kosovo, said "misbelievers" in the Balkans would face "horrible days".
The pope is expected to be greeted by some 100,000 people in the Bosnian capital Sarajevo. He will hold a mass for 65,000 at the city's Olympic Stadium.
Experts say Francis's visit represents a significant challenge for the security forces in the country that has become a fertile ground for homegrown jihadists.
Bosnian Muslims, who make up 40 percent of the country's 3.8 million inhabitants, are mostly moderate.
But the strict interpretation of Islam by the foreign fighters who fought in Bosnia during the 1992-1995 war has been adopted by some locals 20 years later.
Some 200 Bosnians are believed to have joined groups fighting in Iraq and Syria, with around 50 believed to have already returned to Bosnia, the intelligence services estimate.
To prevent them travelling abroad, the authorities have amended the law so jihadists and their recruiters face up to 20-year jail terms.