Last Wednesday the Australian Navy patrol boat Launceston intercepted an Indonesian fishing boat off Ashmore Reef, a tiny collection of islands 320km off the northern coast of Western Australia.

The remote atolls, with sparse vegetation framing their two lagoons and banks of shifting sands, are the closest outposts of Australia to Indonesia. For decades, they have been the marker for boatloads of desperate refugees seeking asylum.

The 48 asylum seekers found in the dark of a tropical night and transferred to an Australian Customs vessel are part of a trauma that is steadily gripping Prime Minister Kevin Rudd's Labor Government as it heads towards an election this year.

Rudd had emerged as a champion of the asylum seekers when he won office in 2007, overturning the draconian excesses of former Prime Minister John Howard's conservative administration.

He closed the appalling detention centres in outback Australia and the isolated camps on Nauru and Papua New Guinea established under Howard's "Pacific solution", and eased other laws in a new policy welcomed by many.

But HMAS Launceston's interception of the boatload of asylum seekers, the eighth this year, has cemented Rudd in the same morass that afflicted Howard: after a long pause, the flood of boat people from Indonesia has resumed, with 60 vessels carrying almost 3000 people intercepted last year.

The Opposition blames the easing of its hard-line policies. The Government points to a global surge in refugees triggered by war, hunger and poverty.

Either way, the net result is a growing crisis that is pushing detention facilities on Christmas Island to breaking point and producing its own tragedies as desperation and the Indian Ocean continue to take their toll.

This week, as the Launceston arrived at Ashmore Reef, Northern Territory Coroner Greg Cavanagh opened an inquiry into the deaths of five asylum seekers whose boat exploded and sank after it was intercepted by navy ships last year.

The evidence so far has been distressing. According to witnesses no one was sure what to do with the boat known as SIEV 36 and its passengers, with a change in Government policy the day before cancelling earlier instructions to escort seaworthy vessels back into international waters and direct them to sail back to Indonesia.

Instead, asylum seekers were to be taken to the detention centre at Christmas Island.

Cavanagh has been told that the asylum seekers had made it clear to the Australian sailors that they would not return to Indonesia, Navy inspections had missed a supply of petrol, and had failed to confiscate cigarette lighters and matches.

A boarding party smelled petrol, realised that the engine had been sabotaged, and scuffled with a man crouched in the bow with a lighter in his hands.

Shortly afterwards the boat exploded, hurling sailors and many of the 47 asylum seekers into the water. Others leapt for their lives into the sea.

Under Navy policy, Australian sailors were rescued first. Medical assistant Corporal Sharon Jager told the inquiry that a sailor had kicked two asylum seekers in the head as they tried to clamber aboard an inflatable boat, fighting to pull her from the water.

The tragedy has graphically underlined the problem now facing Rudd.

He has the same conflict between politics and humanity that has confronted Australia since the first boatloads of refugees escaping the aftermath of the Vietnam War began arriving in the 1970s, despite the changes he made to the treatment of asylum seekers following his election in 2007. While he has he shut down the Nauru and PNG camps, mothballed the grim high security Baxter centre near Port Augusta in South Australia, and eased the conditions under which asylum seekers are held, mandatory detention remains the core policy.

Professor Patrick McGorry, a mental health expert who last week became Australian of the Year, raised eyebrows when he described detention centres as "factories for producing mental illness and mental disorder".

McGorry later clarified his remarks, saying he was referring to conditions under the Howard Government and commending the changes introduced by Rudd.

But he was still critical of mandatory detention, urging the Government to process asylum applications as fast as possible and to allow asylum seekers to live in the community while their applications were being dealt with.

The Government remains committed to its policy and mandatory detention on Christmas Island, a 135 sq km rock in the Indian Ocean, 2650km west of Perth. Immigration Minister Chris Evans said this week that this policy would not change, and that Christmas Island allowed asylum seekers to undergo quick health, identity and security checks, and to have applications rapidly processed.

"People are being looked after appropriately," he said. "They are detained, but they are supported and we have no concerns about mental health."

But Christmas Island is bulging at the seams. It is a new facility, designed originally to hold 400 people with a "surge capacity" of 800. It has since been expanded, but overcrowding has forced about 200 of the more than 1600 detainees to live in tents. Last year, rioting broke out amid criticism from the Australian Human Rights Commission, the United Nations High Commissioner for Refugees and Amnesty International.

No one doubts that more boats are on their way.

Inevitably, they will be intercepted by the Navy and their passengers taken to Christmas Island which, under the Migration Act, is excluded from Australia's refugee laws. Although asylum seekers can apply for recognition as refugees, they cannot apply for visas without the personal intervention of the Immigration Minister, they have no access to the refugee Review Tribunal, and have very limited recourse to Australian courts - a policy the Human Rights Commission says undermines Australia's international obligations and jeopardises fundamental human rights.

In a report on the policy and conditions on Christmas Island supported by the parliamentary standing committee on migration, the commission said policy conflicted with reality. The Government said detention was used as a last resort, but on Christmas Island "detention is not used as a last resort and is not based on an individualised assessment of the need to detain each person".

Although there is some community housing, most asylum seekers are held in a high security detention centre or at a low-security facility called the Construction Camp, originally built to house workers building the centre.

The commission said the centre "looks and feels like a prison". It said security measures were excessive and inappropriate. "The centre is surrounded by a series of high wire fences," the commission said. "Within the facility, each compound is enclosed by another high fence, and many of the walkways into the compounds are enclosed within cage-like structures. Most areas of the facility are also under CCTV surveillance [and] within the compounds, officers' stations are situated within metal-reinforced booths behind security screens".

The commission described the bedrooms as small and claustrophobic, with windows covered by metal grills that did not appear to serve any practical purpose.

It was also critical of the standard of mental health care, despite the fact that many detainees had previously suffered torture and other trauma in the homelands. When the commission visited the island late last year it said the three staff providing psychosocial assessment and counselling were overwhelmed by the need of 700 detainees. The numbers have more than doubled since then.

The commission was also concerned that children remained in detention - some of them in the centre, and others at the Construction Camp.

"The Construction Camp is not an appropriate environment for children," its report said. "It is a claustrophobic facility consisting of demountable [housing] linked by covered walkways. There is little open space, there are virtually no trees, and there is no open grassy area for children to play. The bedrooms are very small, with beds that are not appropriate for babies or young toddlers."

As continuing arrivals threaten to burst Christmas Island open at the seams, Australia's boat people will become a deepening nightmare for Rudd.