Australia's Islamic community must resolve the dispute surrounding leading cleric Taj Aldin Alhilali or risk a lasting backlash against Muslims, Prime Minister John Howard says.

Muslim leaders decided not to sack Sheik Alhilali, the mufti of Australia, for comparing women to "uncovered meat" and suggesting women who did not wear the hijab invited sexual assault.

The mufti made the comments to a Ramadan sermon at Lakemba mosque in Sydney.

Mr Howard said the episode was a crucial test for Australia's Muslim community.

"It's not for the government to say who runs a mosque, or who's an archbishop, or who's a rabbi," he told Southern Cross Broadcasting.

"What I am saying to the Islamic community is this: If they do not resolve this matter, it could do lasting damage to the perceptions of that community within the broader Australian community.

"If it is not resolved, then unfortunately people will run around saying `Well the reason they didn't get rid of him is because secretly some of them support his views'."

Mr Howard said he could not sack the mufti because Australia was a secular country that observed the separation of church and state.

However, he did not want the Islamic community to be an object of "criticism and derision".

"We who are not of that faith have an obligation to embrace them and to treat them as part of our community," he said.

"They have an obligation to understand that it is an exercise in self-discipline for them to deal with these sorts of issues."