The chairman of the Prime Minister's indigenous advisory council, Warren Mundine, was in the audience at a Melbourne conference on Thursday night and raised his eyebrows when Mr Abbott made the comment in response to a question about foreign investment.

''Our country is unimaginable without foreign investment,'' Mr Abbott said. ''I guess our country owes its existence to a form of foreign investment by the British government in the then unsettled or, um, scarcely settled, Great South Land.''

Mr Mundine said it was ''a silly thing to say. I just thought it was a bizarre comment.''

Mr Abbott has said he wants to be a ''Prime Minister for Aboriginal Affairs'' and wants to make a ''new engagement'' with indigenous people one of the hallmarks of his government.

Mr Mundine praised Mr Abbott's commitment to improving the lives of indigenous Australians, but added ''we just need to do a bit more education, within the government, on this area.

''There's a few things we still have to work on,'' Mr Mundine commented. ''I know his heart is in the right place,'' but Mr Abbott was sometimes guilty of ''rambling on'', he said.

''If I was him I would have said that the nation was built on foreign investment since 1788 and left it there. We all know Australia was full of people living here when the British arrived.''

Labor senator Nova Peris, the first indigenous woman to be elected to Federal Parliament, said Mr Abbott's comments were ''highly offensive, dismissive of indigenous peoples and simply incorrect''.

''British settlement was not foreign investment. It was occupation,'' Senator Peris said.

Senator Peris, the deputy chairwoman of the parliamentary committee on constitutional recognition of indigenous Australians, said the Prime Minister's comments had set back efforts to recognise the first Australians in the nation's founding document. Senator Peris said she wanted Australians to celebrate ''50,000 years of our nation's history, not just the last 226 years''.

Megan Davis, the director of the Indigenous Law Centre at the University of NSW described Mr Abbott's comments as ''unfortunate and insensitive''.

''I am not sure 'colonialism' is an appropriate analogy for 'foreign investment' nor is 'foreign investment' the most correct way to describe the motives of the British government in 1788,'' Professor Davis said.

''This may be an opportunity to urge those Australians who remain confused about whether Australia was 'settled' or 'scarcely settled' to read the High Court's decision in Mabo (No. 2) or Bill Gammage's book The Greatest Estate on Earth, which won the 2012 Prime Minister's Literary Award for best Australian History,'' she said.

With Gareth Hutchens