The Queen told Mr Abbott it was an interesting time to be in Australia.
Wearing a turquoise fine wool jacquard dress by Angela Kelly, she received the political leaders in the intimate setting of the Morning Room at Government House in Canberra.
The discussion with Mr Abbott, dressed in a royal blue tie, black suit and white shirt, went straight to politics.
"It's an interesting time," the Queen remarked.
"It's never dull," Mr Abbott replied, adding Australians played their politics tough.
"We give no quarter."
Mr Abbott told the Queen Australian society was always dynamic and liked to think "we're a happening place".
The Queen observed that minority government was "a very difficult thing to organise".
Mr Abbott agreed and noted a similar situation in Britain where the Cameron government is a coalition between the Conservatives and the Liberal Democrats.
The former executive director of Australians for a Constitutional Monarchy said it was "a real honour" to be granted an audience with the Queen.
Brilliant spring sunshine flooded the room during the Queen's meeting with Ms Gillard, perhaps prompting the monarch's opening remark: "It's a beautiful morning again."
The prime minister wore a black skirt suit with a ruffled collar, and an ivory silk top.
She bowed, twice, and shook the Queen's hand on meeting her.
The pair chatted about the royal boat trip across Lake Burley Griffin on Thursday and the Floriade flower festival.
"I had no idea they do that every year. I can't believe they dig it all up," the Queen told the prime minister.
They then had a confidential conversation for about 40 minutes, longer than staff had anticipated.
On Friday evening, Ms Gillard will return the favour, hosting a reception for the Queen and Prince Philip at Parliament House.
Singer Geoffrey Gurrumul Yunupingu and the Australian Girls Choir will be among the performers at the invitation-only event.
Also on Friday, the Duke of Edinburgh will attend a reception for the youth award named in his honour.
