Australia's plan to move an embassy in Israel has angered Indonesia but Finance Minister Mathias Cormann doesn't believe it has threatened a major trade deal.
Indonesia wants a guarantee Australia will not move an embassy from Tel-Aviv to Jerusalem before it will sign a free trade agreement, Sky News reports.
Labor leader Bill Shorten says it was a "bad idea" and coalition government should drop the plan.
But Senator Cormann met with Indonesian officials last week and he said none of them mentioned they wanted a guarantee on the embassy move.
"That is not something that was put to me," he told Sky News on Friday.
Prime Minister Scott Morrison was asked on Friday about the status of moving the embassy, which he announced during by-election campaigning in Wentworth, where more than 12 per cent of voters are Jewish.
"I've made observations on that some weeks ago, and it's a matter for the government to consider, within government," he said in Sydney on Friday.
But Mr Shorten told him not to confuse stubbornness with leadership.
"This is a pretty serious issue that our trade with Indonesia could be jeopardised because of an advertising man's thought bubble," Mr Shorten told reporters in Perth.
"Scott, it is time to step up. This wasn't a good idea. The experts are saying it's not a good idea. Malcolm Turnbull is saying it's not a good idea.
"Drop the idea. Not because Indonesia says it is a bad idea, but because it is a bad idea. There is no shame in stepping up and saying it's wrong."
The two nations had been planning to sign the landmark free trade agreement during the Association of Southeast Asian Nations summit in Singapore on November 14, Fairfax Media reported on Wednesday.
Senator Cormann said Australia continues to work constructively with Indonesia and is keen for the deal to be signed by the end of the year.
Indonesia, the world's largest Muslim country and a strong supporter of Palestine, was quick to warn against the embassy move.
"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 said at the time.
The free trade deal is Indonesia's first major agreement of its type, and it will open up the country for Australian universities.