President Susilo Bambang Yudhoyono said Wednesday Indonesia is suspending cooperation with Canberra on people smuggling following allegations that Australian spies tried to tap his phone and those of his inner circle.
He told reporters in Jakarta that Indonesia would temporarily halt coordinated military cooperation with Australia, which includes assistance on people smuggling.
"You are well aware that we are facing a joint problem of people smuggling that has been a problem for both Australia and Indonesia," he said.
He said that Australian and Indonesia work together in an area called "coordinated military cooperation" which involves patrols at sea.
"I have asked for that to be halted until everything is clear," he said.
The issue of people smugglers taking boatloads of asylum seekers from Indonesia to Australia is deeply sensitive for Canberra, which is seeking to stem the influx of thousands of boatpeople.
It was a major issue at elections in September, and Tony Abbott's hardline policy of turning asylum boats back to Indonesia when it is safe to do so helped propel him to the premiership.