Australia's greatest military mystery was solved yesterday with the discovery of a World War II warship which went down with all 645 crew in a fierce battle with a German vessel more than 66 years ago.

A day after searchers located the wreck of the German merchant raider HSK Kormoran off the West Australian coast, Prime Minister Kevin Rudd said they had also found the Australian battle cruiser HMAS Sydney, sunk by the German ship.

Mr Rudd, flanked by top military commanders, said it was "a historic day for all Australians, and a sad day for all Australians".

"It's very important to understand that this is a tomb and there are 645 Australian sailors entombed there," he said, adding both ships would be declared war graves.

The sinking of the HMAS Sydney II is Australia's greatest naval tragedy, with all hands lost after a 30-minute battle with the German ship on November 19, 1941.

The cruiser was also the biggest ship lost with no survivors from any World War II nation, historians said, vanishing after sailing ablaze over the horizon at the end of the encounter.

News of the sinking devastated Australians, plunging the nation into a deep wartime gloom, and the mystery of its disappearance had remained a national obsession. Several false discoveries of the ship's wreck have occurred before.

"It's so many emotions that all I can do is cry," said Debra Malycha-Coombs, whose uncle Walter Leslie Curwood was a 23-year-old wire operator on the Sydney. "My mother died over 20 years ago not knowing where he was," she said.