Consultations will be launched into outlawing the material and the desk-top studies used to assess it, Communities Secretary James Brokenshire announced.
In the United Kingdom, a review into the Grenfell Tower fire says radical changes are needed to fix what's been called the "broken" system of building regulations.
Campaigners branded it a "whitewash" after it failed to recommend either of the measures.
But her decision not to advise a ban on combustible cladding or insulation for high-rise buildings drew immediate condemnation from a wide range of critics including the opposition Labour Party.
The state's housing and public works minister, Mick de Brenni, has told the ABC that while it would cost millions to complete rectifications, the government could not put a price on safety.
He added: "Having listened carefully to concerns, the government will consult on banning the use of combustible materials in cladding systems on high-rise residential buildings".
And Lord Porter, Local Government Association chairman, said it was "disappointing" that the review stopped short of recommending a ban on combustible materials.
"I say to the Secretary of State, don't consult on it".
Her report mentioned that ignorance led a "race to the underside" in constructing security practises which prioritised cost-cutting over security.
During the debate, Labour former minister David Lammy paid tribute to family friend Khadija Saye, a 24-year-old artist who died in the fire.
"There's something seriously wrong with the regulatory system", she said on BBC Radio 4, calling for it to be completely overhauled and for tougher sanctions to be introduced for transgressions.
Shadow housing minister John Healey said unless both are banned the report will fall well short of what is needed. "The cladding needs to be taken down immediately".
Well being and security professional Dame Judith Hackitt, who revealed her evaluate of constructing guidelines this morning, mentioned there was a "damaged system" however will not go so far as to completely ban harmful supplies.
The review found that some building firms use the ambiguity around the rules to "game the system", with the primary motivation to "do things as quickly and cheaply as possible" rather than focusing on quality.
Conservative backbencher Kwasi Kwarteng said the government will be judged on its response to the tragedy and warned that the Tory party was at risk of losing the good will of victims of the fire.