The move followed pressure from lawmakers amid police claims the Roman Catholic Church had concealed evidence of paedophile priests.
The inquiry will look at religious groups, NGOs and state-care providers as well as government agencies.
Ms Gillard said a Royal Commission was the best way to investigate the claims.
Late last week, the state of New South Wales announced an inquiry after a top policeman, Detective Chief Inspector Peter Fox, accused the church of trying to silence investigations into allegations of abuse.
Chief Inspector Fox, who had investigated several cases of sexual assault over 35 years, had called for a Royal Commission in an open letter.
"I can testify from my own experience that the church covers up, silences victims, hinders police investigations, alerts offenders, destroys evidence and moves priests to protect the good name of the church," he wrote.
A separate parliamentary inquiry into church sex abuse began last month in Victoria.