Ms Gillard made the long awaited national apology at a special ceremony in Canberra attended by hundreds of people, including mothers betrayed by a system that decided their children were better off elsewhere.
“We acknowledge your loss and grief,” the prime minister said on Thursday.
From the 1950s to the 1970s an estimated 150,000 unwed Australian mothers had their babies forcibly adopted under a practice sanctioned by governments, churches, hospitals, charities and bureaucrats.
Some women were tricked into signing adoption papers, drugged and physically shackled to hospital beds.
Ms Gillard was speaking ahead of parallel motions being moved in the House of Representatives and the Senate later on Thursday to formalise the apology.
It will say that the parliament, on behalf of the Australian people, takes responsibility and apologises for the policies and practices that forced the separation of mothers from their babies.
“This apology is extended in good faith and deep humility,” Ms Gillard said.
“It will be a profound act of moral insight by a nation searching its conscience.”
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The prime minister spoke of young and vulnerable women who lost their children under pressure and sometimes the influence of drugs.
“Most common of all was the bullying arrogance of a society that presumed to know what was best,” she said.
“For decades, young mothers grew old haunted by loss.”
Ms Gillard also spoke of the children who were adopted, some of whom suffered sexual abuse at the hands of their adoptive parents or in state institutions.
“Many others identified the paralysing effect of self-doubt and a fear of abandonment,” she said.
But Australia could not forget the fathers, who were often ignored at the time of the births and whose names were not included on birth certificates.
“No collection of words alone can undo all this damage,” Ms Gillard said.
“But by saying sorry we can correct the historical record.
“We can declare that these mothers did nothing wrong.
“That you loved your children and you always will.”
Ms Gillard received a standing ovation after her speech in the Great Hall of Parliament House.
Opposition Leader Tony Abbott told the story of his former girlfriend Kathy Donnelly, who in 1977 gave birth out of wedlock to a son, whom for years Mr Abbott believed was his.
“There is no stronger bond than that between mother and child,” he said.
“There are no first or second class mothers … and every mother has the right to raise her child – we know it now and we should have known it then.
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A number of women in the audience began yelling at Mr Abbott when he used the words “birth parents”.
He said: “We honour the birth parents, including fathers, who have always loved their children.”
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In some quarters, the term “birth parent” is deemed insensitive to women who relinquished their children under difficult circumstances.
The parliamentary motions to be moved on Thursday will also acknowledge the profound effects of forced adoption policies and practices on fathers.
