The couple were attacked after they disturbed burglars in the early hours of yesterday morning at their home in North Rocks, a north-west suburb of Sydney.
Their children, Claire, eight, and Andrew, three, slept through the attack, which happened at about 9pm our time (6am Saturday morning local time).
Two intruders woke the couple at about 5.50am when they broke into the house in the upper-middle-class suburb, said Detective Sergeant Russel Oxford. Mrs Wallace was stabbed in the chest when she challenged the men, who also stabbed her husband during a brief struggle.
Mr Wallace, who worked as a safety manager for Comalco, a large metal manufacturing company, in Parramatta, north- west Sydney, managed to telephone police before passing out, still clutching the receiver, said Det Sgt Oxford. He was able to tell officers that the intruders were wearing T-shirts and jeans.
Neighbours were woken just before dawn by the screech of tyres as the burglars made their escape empty-handed. Tom Leggett, who lives across the road from the couple's home, said: 'It's not something you expect to happen around here. This is a family area.'
Next-door neighbour, Phil Walsh added: 'They were a very happy, lively young family with their whole life ahead of them, you'd have thought.'
Mrs Wallace's father, Gerald McIntosh, a retired fruit and vegetable importer, of Willerby, Hull, said last night: 'She was a very lovable girl. Steve is in a stable condition. According to the police, his wounds are not life-threatening and he should recover all right.
'We may go over there in the next few days. It has all happened so quickly and it seems totally unreal, with them being so far away.'
He said the couple had lived in Australia for a while after their marriage. 'We had heard from them in the last week and everything seemed to be going so well.'
They returned to Britain when Mrs Wallace was expecting Claire and lived in Newport, Gwent, where Mr Wallace, who has a degree in metallurgy, worked at the Alcan aluminium factory. Mrs Wallace also worked in the town as a part- time computer programmer.
A Sydney police spokesman said: 'We have appealed for anybody who may have seen suspicious activity in the area to contact police.
'We believe she (the victim) had met her husband while he was working in the UK, though we don't know how long they had been married.
'Sadly, Australia is used to violent crime, like most other parts of the world, but this was a particularly nasty attack and has shocked people in New South Wales.'
The police plan to resume a detailed search of nearby bushland today in an attempt to find the murder weapon.
The children were yesterday being cared for by friends of the family.Reuse content