Testing detected the H5N1 strain in a greater crested tern discovered at Robe in South Australia.
The case marked a major escalation in the crisis, Invasive Species Council policy director Carol Booth said.
"We're potentially about to face a devastating wildlife emergency," she told AAP.
"It's really a worst nightmare."
It's the first known infection in a wild non-migratory mainland bird rather than a migratory species from the Southern Ocean.
Wildlife ecologist Bill Bateman said it was a concerning development and the disease could spread inland.
"It is a route for it to spread into our ducks and geese and potentially also then into scavenging birds like crows, and then further inland and into bush birds," he said.
"What we can expect to see is probably a collapse or a very, very deep crash of many of our breeding species of birds.Â
"That's the worry."
The worst-case scenario would be if the disease spread into mammal populations, Curtin University Associate Professor Bateman said.
"We have the most unique mammal fauna of anywhere in the world," he said.
Two further birds in SA and another in Western Australia have also been confirmed as carrying H5, bringing the total to 12 detections.
An additional suspected case in WA remains under investigation.
A New Zealand fur seal in NSW is reportedly under observation in what could be the first infection in an Australian mammal species.
Scientists were trying to understand how the tern became infected, federal Agriculture Minister Julie Collins said.
"What we do know is that this is a coastal seabird with an overlapping coastal range with migratory seabirds that have previously tested positive for H5," she said.
Ms Collins stressed there was no evidence of mass mortality among wildlife, no infections in commercial poultry or other agricultural settings and the risk to human health remained low.
"While this is a concerning development, it is not unexpected and is another sign that our strong biosecurity system is working," she said.
SA Primary Industries Minister Clare Scriven said the tern was an isolated case and there was no evidence of other deaths in the Robe area.
"We're still considering this an isolated case," she said.
Environmental groups fear the first native bird case is a worrying turning point, warning an entrenched wildlife outbreak could be devastating.
Conservationists are urging the Albanese government to fund a $200 million wildlife resilience package, arguing surveillance alone will not be enough if H5 becomes established.
"The best thing we can do for wildlife is to reduce other threats now so they have the best chance of surviving and recovering from disease outbreaks," Dr Booth said.
That includes tightening control on invasive cats and foxes that prey on native animals, eradicating invasive species from islands and restoring wetlands to strengthen habitats for aquatic birds.
The SA government is leading the response around Robe, on the Limestone Coast, where the tern was discovered, with enhanced surveillance in the area.
Federal experts, including Australia's chief veterinary officer, had met to guide the national response, authorities said.
People have been warned not to touch sick or dead birds or wildlife, to keep pets away and to report unusual deaths or behaviour.