Indonesian Foreign Minister Retno Marsudi, speaking at a joint news conference with Palestinian Foreign Minister Riyad al-Maliki in Jakarta, reaffirmed his country's support for a two-state solution to the Middle East dispute and warned Australia against the risk of insecurity.
In a statement, Palestine's embassy in Australia called Morrison's announcement "deeply disturbing". He's arguing it can be done consistent with Australia's long-running position.
Indonesia, the world's biggest Muslim-majority country and a major buyer of wheat and beef, bought more than AUS$3 billion of Australian agricultural commodities in 2017, according to government data.
It has the unintended effect of making it hard for Indonesian President Joko Widodo to pursue a positive relationship with Canberra.
Prime Minister Morrison told Parliament during Question Hour he had been in touch with Mr Joko to discuss his position, as had the two foreign ministers.
"No decision has been made in regarding the recognition of a capital or the movement of an embassy. but at the same time, what we are simply doing is being open to that suggestion".
"We'll continue to work closely and co-operatively with our allies and with our partners all around the world on these issues", he said.
"We have agreed that we will send a letter to the foreign minister expressing our worries and our concern about such a statement", he said.
Mr Marsudi said: "Indonesia asks Australia and other countries to support peace talks and not take steps that would threaten that peace process and stability of world security".
Australia will also review its support for the Iran nuclear agreement due to "potentially destabilizing behaviour in the Middle East when it comes to the activities of Iran", Morrison said on Tuesday.
"The people of Wentworth, and all Australians, deserve a leader who puts the national interest ahead of his self-interest, and governs in the best long-term interest of the nation", Labor lawmaker Penny Wong said.
Crediting the former Australian ambassador to Israel, Dave Sharma, of bringing up the relocation issue to a public debate, Morrison noted that he remains "open-minded" about the "sensible" and "persuasive" possibility of following US President Donald Trump's controversial move.
Morrison told reporters in Canberra the strength of relationship enabled "neighbours to have different views on things from time to time" and while Australia was a sovereign nation able to consider its policy "all we have done" so far is consider moving the embassy. The US embassy was relocated from Tel Aviv to Jerusalem in May.
"The commitment to review policy on Iran, with a view towards taking a stand which would genuinely impact on that state's ability to continue to destabilize the Middle East, promote terrorism and existentially threaten Israel, is timely and necessary, given the changed USA policy and increasingly aggressive Iranian behavior".
"Morrison's embassy announcement seems reckless and has the potential to be received poorly in nations such Indonesia and Malaysia", said Greg Barton, chair in global Islamic politics at Melbourne's Deakin University.
"I have made this decision without any reference to the United States", he said.