Button, the 2009 Formula One champion, was second and fifth fastest respectively in the day's two sessions but was under no illusions about the real pecking order at the start of the season.
"We're nowhere near the quickest," the Briton told reporters at Albert Park. "We were two seconds off them (Mercedes) in the test, we're over a second off them in the long runs.
"I think everyone is about a second off them in the longer runs. They're very quick," added the Briton, a three-times winner in Melbourne and now with a new team mate in Danish rookie Kevin Magnussen.
"It's a little bit surprising that they are much quicker than everyone else, including the Williams really. The Williams looks a bit of a handful to drive in high speed corners, which is a surprise."
McLaren, the former champions who had an abysmal 2013 season without a single podium finish, have the same power unit as Mercedes, Williams and Force India - the new turbocharged 1.6 litre V6 with energy recovery systems.
Mercedes were overall runners-up in the constructors' standings last year to champions Red Bull.
While Renault have struggled to get their engine running smoothly, Mercedes have looked the pick of the manufacturers in pre-season testing with their teams lapping quicker and more consistently.
Former champions Williams, who scored just five points last year, have been tipped as the team most likely to show a significant improvement this season.
While Valtteri Bottas and Felipe Massa were third and fourth in the first practice session, they were only eighth and 12th respectively in the second when they ran different programmes.
Button said the new cars took some getting used to, particularly in the long runs when fuel saving becomes an issue due to the new limit of 100kg of fuel for the entire race compared to 150-160 previously.
"The long run is not as exciting as you would hope because there's so much fuel saving, there's a lot of lifting and coasting. But on low fuel they're a handful and enjoyable," explained the Briton.
"All our electronics are working OK but our balance still isn't there, we still don't have a good balance, we're struggling in high speed (corners)," he added.
"In low speed corners we're reasonable....It's just working on the balance really, we're not there. I don't think our outright pace is maybe as good as it looks in practice but I think we're OK."
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