Australia is on high alert for attacks by radicalised Muslims or by home-grown militants returning from fighting in the Middle East, having raised its threat level to "high" and unleashed a series of high-profile raids in major cities.
Melbourne-born Neil Prakash is the third Australian citizen to have his assets frozen by the government because of membership in the radical Sunni group, which has seized wide swaths of territory in Iraq and Syria.
Prakash, who is believed to have relocated to Syria last year, joins two Australian Islamic State fighters on the list, Mohamed Elomar and Khaled Sharrouf, who appeared in images last year holding the severed heads of Syrian soldiers.
"Prakash has sought to commission violent terrorist acts, including in Australia," Bishop said in a statement.
"He has exploited social media to spread violent extremism and to recruit others, including young women and girls, to travel to Syria and Iraq to join Daesh," she added, using an Arabic acronym for the group.
"Listing Prakash ... sends a strong message to anyone who recruits for, or travels overseas to join, a terrorist organization that the Australian government will do everything within its power to combat the threat of terrorism on all fronts."
Australian citizens can face up to a decade in prison for travel to overseas areas declared off-limits, under tough new security powers declared by Prime Minister Tony Abbott's conservative government in October.
Abbott has also worked to halt the flow of funds to overseas groups. The government last year shut a money transfer business linked to Sharrouf's family, on suspicions it transferred up to A$20 million to foreign militants.
Prakash has appeared in English-language propaganda videos for Islamic State, brandishing an assault rifle and urging attacks against Australian civilians.
The sanctions threaten anyone giving financial assistance to Prakash with punishment of up to ten years in jail and a fine of A$425,000 ($328,355), or three times the value of the transaction.
Abbott last month ruled out an amnesty for Australians seeking to quit foreign militant groups and come home, and wants to strip Australian citizenship from those with dual nationality, if they engage in militant acts.
($1=1.2943 Australian dollars)
(Reporting by Matt Siegel; Editing by Clarence Fernandez)