Indonesia summonsed Australia's ambassador on Friday to explain media reports his embassy in Jakarta was used to spy on Southeast Asia's biggest country as part of a US-led global spying network.
Indonesia this week called in the chief US diplomat in Jakarta over similar allegations, while China on Thursday demanded an explanation from the United States after the Sydney Morning Herald newspaper reported Australian embassies across Asia were part of the US spying operation.
News of Australia's role in a US-led surveillance network could damage relations with Indonesia, Australia's nearest Asian neighbour and a key strategic ally.
"Indonesia's Foreign Minister Marty Natalegawa has demanded an explanation from the Australian ambassador in Jakarta about the existence and use of surveillance facilities in the Australian embassy here," Indonesia's foreign ministry said in a statement.
"The reported activities absolutely do not reflect the spirit of a close and friendly relationship between the two neighbours and are considered unacceptable by the government of Indonesia."
The Herald said its reports were based on US whistleblower Edward Snowden and a former Australian intelligence officer.
Snowden leaks to other media have detailed vast intelligence collection by the US National Security Agency (NSA) on allies, including German
Chancellor Angela Merkel, prompting protests and a US review of intelligence gathering.
The Herald said Australia's top secret Defence Signals Directorate (DSD), which is at the forefront of cyber security intelligence, operates clandestine surveillance facilities at embassies without the knowledge of most Australian diplomats.
"DSD is the most important of Australian intelligence agencies. It is involved in high-level technical cooperation with its American counterpart, the National Security Agency," said Richard Tanter, Senior Research Associate at the Nautilus Institute of Security and Sustainability.
"The US would find it very useful to have its own intercept from its own embassies in those countries, it will find it very useful to be supplemented by what Australia is doing...a kind of division of labour from country to country."
Tanter said Australia had been monitoring Indonesia for a long-time, seeking terrorism and human rights information.
"But the problem is when it goes beyond that. Beyond that, there will a question of whether such electronic intercepts really are appropriate activity for a country which we have a strong and close relationship," he said.
Natalegawa, in Australia for a meeting with his counterpart Julie Bishop and other regional foreign ministers, said Australian spying could "potentially damage the kind of trust and confidence that have been nurtured and developed over many decades" between the two nations.
"I think we have been able to communicate to Foreign Minister Bishop about our concern," Natalegawa told reporters in the west Australian city Perth.
Bishop said: "Foreign Minister Natalegawa raised his concerns, I took them on board, I take them seriously, but the Australian government does not and will not comment on intelligence matters."
Bilateral relations were already shaky after Australia's new conservative prime minister, Tony Abbott, in September proposed turning back boats of asylum-seekers coming through Indonesia.
Abbott made his first official trip overseas to Jakarta last month where he sought to played down tensions over the asylum seekers issue and called instead on both countries to focus on boosting bilateral trade.