Australian Zomi Frankcom was killed in an attack on an aid convoy in April 2024 while working with colleagues to deliver food and basic supplies.
Six of her coworkers from US-based group World Central Kitchen also died.
The Israeli military announced overnight it had found there was no suspicion of criminal misconduct surrounding the Australian's death and would not look into it further, despite a previous finding there had been failures in conduct.
Ms Frankcom's family said the findings were an insult to her legacy.
"(We) have been waiting for justice for over two years, hoping and calling for an independent criminal investigation," a family statement released on Thursday said.
"This was not a single, instantaneous strike.
"Zomi and her colleagues deserve more than an internal, opaque process that ends with a short statement by the Israeli military absolving their soldiers of criminal wrongdoing."
Foreign Minister Penny Wong condemned the actions of Israel.
The Israeli government's decision not to pursue criminal proceedings against those responsible for the attack fell "far short of the accountability we expect".
"(I) have directed Australia's ambassador to Israel to convey our views directly to Israel as the Australian government considers next steps," she said.
She ruled out expelling Israeli ambassador Hillel Newman from Australia despite mounting pressure to do so, and said the two countries would continue having diplomatic ties.
"We maintain those relationships because they enable us to engage in order to advance Australia's interests," Senator Wong told reporters.
"Removing an ambassador will remove our ability to be able to engage and press for Australia's interests."
Dr Newman was summoned to Parliament House on Thursday for a formal meeting by Senator Wong.
"We express deep sorrow and grief with the family of Zomi Frankcom, and I'd like to tell them straightforward: we grieve with you," he told reporters.
Dr Newman said the aid convoy decided to put armed personnel on it without telling Israel, and deviated from the pre-approved route.
"One cannot attack findings of a court if the findings are not suitable to one's political agenda," he said.
The Israeli ambassador was driven in through the back entrance to parliament as part of a convoy of black cars.
He said mistakes were made by both the aid convoy and the Israeli military.
Dr Newman declined to apologise for Ms Frankcom's death on behalf of Israel, saying it could imply criminal responsibility.
He didn't rule out a potential appeal of Israel's decision.
Israel's military announced it had completed reviews of 150 cases of troop conduct in Gaza and made decisions on five cases, including the attack that killed Ms Frankcom.
There was "no reasonable suspicion of criminal misconduct that would justify the opening of a criminal investigation", the statement read.
The World Central Kitchen convoy was marked as supplying aid when it was struck in Khan Younis, southern Gaza.
The Israeli military initially claimed the convoy was being used by Hamas, before later acknowledging it had been misidentified and admitting errors in the decision-making process before the attack.
Two Israeli officers were dismissed from their positions and three senior officers were formally reprimanded, according to the Israel Defense Forces.
In a statement, World Central Kitchen said it fundamentally disagreed with the Israeli military prosecutor's decision about a criminal investigation into the IDF air strikes that killed its team.
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