Former NSW Supreme Court judge Terence Cole QC will head a Defence inquiry into the sinking of the HMAS Sydney II in 1941, it has been announced.

Acting prime minister Julia Gillard and defence force head Air Chief Marshal Angus Houston said today the Commission of Inquiry would hopefully shed more light on how the ship was lost with all 645 men on board.

Ms Gillard said the inquiry would be able to use the additional information likely to become available from the discovery of the Sydney wreck off the West Australian coast last week.

“More than 600 of our nation’s finest sailors and airmen lost their lives and we still don’t know exactly how Sydney II met her end,” she said.

“I hope that through this inquiry we have a better understanding of what happened on that fateful day. In particular, I know that this Inquiry will have special significance to the families of those who lost loved ones on Sydney II.”

Air Chief Marshal Angus Houston has praised Terence Cole's appointment as the inquiry's president, saying the former justice was "eminently qualified" to preside over one of Australia’s greatest maritime mysteries.

“I am extremely pleased that Mr Cole has accepted this appointment," he said.

"He has a wealth of judicial experience and is very capable of undertaking this important task."

Mr Cole has presided over two Royal Commissions - including the AWB wheat for bribes scandal.

He has also been a NSW Supreme Court Judge, NSW Court of Appeal justice and Deputy Judge Advocate General of the Australian Defence Force.