The incident happened last month after a group of American soldiers burned several Korans in Afghanistan, Postmedia News reported Monday.
Video footage shows a mob smashing headstones at the war cemetery, saying, "They are dogs."
A total of 1,214 Commonwealth troops who died in the North African desert battles of World War II are buried at the war cemetery in Benghazi.
Libya's transitional government has condemned the attacks and vowed to find the perpetrators.
On Monday, Australian officials said they were "appalled and disgusted" by the incident.
"The government is appalled and disgusted by these reports, and condemns without reservation this act of desecration," a spokesman for Australian Prime Minister Julia Gillard said.
"Should the reports prove accurate, we call on the Libyan interim government to investigate and hold to account those responsible," she said.
Notable deaths of 2014 [PHOTOS]