The study of 48 police shootings found more than 87 per cent of victims had schizophrenia and other severe mental illnesses.
Disproportion has risen despite a police plan to tackle the number of fatal shootings.
James Ogloff, one of the authors of the Monash University research, said it was a tragedy, victimising a group of already disadvantaged people.
He called for more police training so officers could help people in emotional distress.
But Ian Hickie, the executive director of the Brain and Mind Research Institute, blamed the state and federal governments.
He said just 2 per cent of government health spending went to tackling mental illness.
''It is a Mexican stand-off where lives are being lost, it's horrific,'' Professor Hickie said.
''One in five people has a problem and every family will have to deal with the mental health issue. But it is not the government's No. 1 priority.''
He said the Commonwealth failed to agree to fund 100 per cent of mental health at the recent COAG meeting and the states did not negotiate.
The deaths were recorded from November 1982 to February 2007, a period that straddled a policy shift - Project Beacon - that slashed the number of fatal shootings by more than 50 per cent.
But since the plan's introduction in 1995, there has been no improvement in the rate of mentally ill people being shot.
Professor Ogloff praised police for including dealing with mentally ill people in their training but said more needed to be done. He said a sustained, long-term plan was needed. The findings were published in the latest edition of the Australian and New Zealand Journal of Psychiatry