A bullet found inside a skull buried on a remote Indian Ocean island has added further intrigue to Australia's greatest naval tragedy, the mysterious World War Two sinking of a warship with the loss of all 645 hands.

The light cruiser HMAS Sydney II sank somewhere off Western Australia's northwest in November 1941 after it came under fire from a German raider, thought to be the Kormoran disguised as a Dutch merchant ship.

The Sydney has never been found after it sailed ablaze over the horizon at the end of a fierce 30-minute battle.

Australian defense officials said a navy team had this month exhumed the remains of an unknown sailor buried in an unmarked grave on Christmas Island, remains long thought to be those of a Sydney crewman.