Indonesia has warned Australia that moving its Israeli embassy to Jerusalem could undermine the peace process with Palestine.
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But the country has refused to comment on reports it is considering suspending a soon-to-be-signed trade deal with Australia.
Australian Prime Minister Scott Morrison floated the idea of moving the embassy just days out from a by-election in one of Australia's most Jewish electorates.
But the move has threatened relations with Indonesia, the world's largest Muslim country and a strong supporter of Palestine.
"Indonesia encourages Australia and other nations to continue to support the peace process and not conduct any action that could undermine the peace process and global security," Indonesian Foreign Minister Retno Marsudi told reporters on Tuesday.
She had just met with Palestinian Foreign Minister Riyad al-Maliki, who is visiting Indonesia.
The ABC reports Indonesia is considering suspending an imminent free trade agreement in response to Australia's proposal, but Indonesian Foreign Ministry spokesman Arrmanatha Nasir declined to comment.
Mr Morrison played down the concerns.
"I have been in direct contact with President Joko Widodo over the course of last night and through this morning," Mr Morrison told parliament on Tuesday.
"I have been pleased to be able to explain very clearly the nature of the announcements that I have made today.
"And I have been very pleased with the response that I have received from President Joko Widodo."
Mr Morrison said he looked forward to going to the ASEAN, APEC and G20 summits in coming months and talking about his ideas of doing things differently in the Middle East.
The free trade deal with Indonesia is set to unlock education opportunities in the Asian country, which has a workforce of more than 130 million people but half of them only have a primary school education.
Labor spokesman Chris Bowen hopes speculation about the trade deal turns out to be incorrect.
But he says it's obvious the government's sentiment on the Israeli embassy has affected Australia's relationship with Indonesia.
"Clearly this has impacted the bilateral relationship to some degree," he told ABC radio on Tuesday.
Australian Associated Press
