It expressed surprise in a statement at what it said was "the paradoxical logic" of the Australian prime minister who emphasizes adherence to the two-state solution and continues to encourage the parties to continue dialogue and negotiations toward a peace agreement, while considering recognizing Jerusalem as the capital of Israel.
According to the Israeli Prime Minister's Office, Netanyahu spoke with the Australian leader ahead of his announcement on Jerusalem and "thanked him for his remarks".
Foreign Minister Retno Marsudi, speaking at a joint news conference with Palestinian Foreign Minister Riyad al-Maliki in Jakarta, reaffirmed Indonesia's support for a two-state solution to the Middle East dispute and warned Australia against the risk of insecurity.
He attributes his radical departure from long-standing global consensus to the persuasive powers of a former Australian ambassador to Israel, Dave Sharma, the Liberal Party's candidate in this Saturday's byelection in former prime minister Malcolm Turnbull's electorate of Wentworth, which has an unusually high proportion of Jewish voters.
He said, "No decision has been made in regarding the recognition of the capital or the movement of an embassy", but that Australia's "government is open-minded about this".
Late previous year, the US President Donald Trump ordered the US embassy to be moved to Jerusalem and the relocation was completed by April 2018.
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"We'll continue to work closely and cooperatively with our allies and with our partners all around the world on these issues", Mr Morrison added.
The status of Jerusalem is perhaps the thorniest issue in the Israeli-Palestinian conflict.
Wentworth, an affluent and diverse constituency, is home to a large Jewish community.
If Australia were to move its embassy, it would be following the lead of US President Donald Trump, who did the same thing earlier this year. While the Palestinians insist on drawing the demarcation lines along the 1967 borders, with East Jerusalem serving as the capital of the future Palestinian state, Israel claims historic rights to the entire city.
Morrison was adamant that "no decision has been made", but the idea has angered Arab and Muslim states as well.
Labor opposition foreign-affairs spokeswoman Penny Wong said Morrison was playing "dangerous and deceitful" word games to bolster Sharma.
AIJAC National Chairman Mark Leibler said "recognising Jerusalem as Israel's capital - something the government now says it is seriously considering - would right a longstanding injustice, as Israel is the only state in the world which the worldwide community insists has no right to choose its own capital".
In December 2017, United Nations member states voted decisively at the General Assembly in favour of a resolution effectively declaring USA recognition of Jerusalem as Israel's capital to be "null and void" and demanding it be cancelled.
This claim has prompted debates in Australia and overseas, as the status of Jerusalem has been one of the key stumbling stones for negotiating a Palestinian-Israeli peace deal.