The NSW Civil and Administrative Tribunal in May said it was unreasonable and unnecessary to wear the scarves during the drill at Sydney's Central station in October 2017.

The exercise involved about 200 people - including police and other emergency services - to test the co-ordination and response to a terrorist or high-risk incident.

The drill included two "active armed offenders" using what looked like semi-automatic firearms holding "hostages" and wounding some with knives.

The tribunal said balaclavas or masks could have been used on the officers acting as the perpetrators instead of clothing identified with particular cultural communities in Australia.

"We find that NSW Police Force, by allowing the two police officers portraying the armed offenders to wear keffiyehs associated with Palestinian and Arabic people, racially vilified Palestinians and Arabs," the tribunal found.

The tribunal said that using the headscarves in the drill had the "capacity" to incite hate or serious contempt of Palestinians or Arabs but acknowledged NSW Police didn't intend to vilify any racial group.

NSW Police on Tuesday issued a statement, as ordered by the tribunal, acknowledging the decision.

"NSW Police Force apologises for the use of these headscarves in the exercise," it said.

The ruling followed a complaint from Sydney man Sam Ekermawi after the exercise was widely publicised online, in print and on television and radio.

He claimed the headscarves worn by the two "active armed offenders" were the same as those worn by Palestinians, Arabs, Middle Eastern people and Muslims and their use "incited hatred or serious contempt" of those people on the grounds of their race.

The tribunal also ordered NSW Police to implement a racial vilification education program for its media unit and high-ranking officers within two years.

Australian Associated Press