Some 61,000 Australians and more than 18,000 New Zealanders died in the war, an event Abbott said was "the most cataclysmic event in human history".
"World War I arguably gave rise to communism, to Nazism, to World War II and the Cold War," he said at a wreath laying ceremony in Canberra one of several commemorations taking place across Australia.
"The events of a hundred years ago still reverberate around our world today and it had a shattering impact on the young Commonwealth of Australia.
"This cauldron shaped our nation. Even now, these events shape our nation.
More From This Section
"For us at least, World War I was not a war of conquest, it was a war of freedom. It was a war for our allies, for our values," he added.
The bloody conflict, which officially began on August 4 when Britain declared war on Germany after its invasion of Belgium, remains the most costly in terms of deaths and casualties that Australia has been involved in.
Key told a parliament ceremony that the start of the war had a profound effect on New Zealand, which had only been declared an independent dominion from Britain seven years earlier.
"The first World War changed how New Zealanders viewed ourselves and how other countries view us," he said. "It laid the foundations for the country that we have become today.
"For New Zealand... The centenary is an opportunity to recall the part paid by our forces, to honour the service and sacrifice of our countrymen," he added.
The four-year conflict that became known as the Great War left some 10 million dead and 20 million injured on the battlefields. Millions more perished under occupation through disease, hunger or deportation.