Mansell took pole position for the race, but a poor start off the grid enabled teammate Piquet, Ayrton Senna and Keke Rosberg to overtake him and demote him to fourth by the end of the first lap.
However, the Finn retired with a puncture on lap 63, handing the lead back to Piquet and elevating Mansell into third place, which would have been sufficient to secure the championship.
The Williams-Honda was superior in speed to the McLaren-TAG, with Mansell and Piquet having won nine of the previous fifteen races between them, and the team sealing the Constructors' Championship at the Portuguese Grand Prix in late September.
Friday's qualifying was interrupted about halfway through by a sudden and heavy downpour which caught out both Patrick Tambay (Haas Lola) and Johansson who (in separate accidents) slid off the road behind the pits and across the wet, muddy grass of the Victoria Park Racecourse infield before hitting an unprotected concrete wall side on with both the Lola-Ford and the Ferrari wrecked upon impact.
However, while others around them improved on their Friday times, neither the reigning World Champion nor his soon to be retired team mate Rosberg (who was 2nd in the morning session) could get near the morning times in the afternoon, reporting a distinct lack of grip even before Streiff's Renault blew-up and all but ruined the last 20 minutes of qualifying after he coated the racing line down the Brabham Straight and around the right hand hairpin with a good amount of Elf's finest before parking his Tyrrell off to the inside of the hairpin exit.
Home country hero Alan Jones in his last drive in Formula One was, for a rare time, ahead of his team mate Tambay on the grid.
The Australian Grand Prix also saw Tambay's Lola and the Lotus of Johnny Dumfries each carrying an onboard camera for television use.
During qualifying, Martin Brundle's Tyrrell-Renault was timed at a fastest of all 205 mph (330 km/h) on the 900 metre long Brabham Straight.
On lap 23 Piquet spun, although no damage was sustained to the car, and he continued the race despite dropping back several places.
Piquet would make a late charge, closing the gap from 15.484 seconds with 2 laps remaining to just 4.205 at the finish and Prost claimed both the race and the World Championship.