Papua New Guinea has suspended Australia's assistance programme because Canberra has refused to apologise for the security search of the Prime Minister, Sir Michael Somare.
The Australian High Commissioner to PNG, Michael Potts, was served a second diplomatic note to Canberra, demanding an apology for what is seen as a breach of protocol.
The PNG Foreign Affairs Secretary, Gabriel Pepson, also advised Mr Potts that PNG was suspending the first quarterly high-level talks on the US$800 million Enhanced Cooperation Programme.
Mr Potts was also advised to suspend further deployment of Australian police officers under the programme.
Last month, officers checking security at Brisbane Airport asked Sir Michael to remove his shoes in the VIP lounge.
The PNG leader had been returning from Auckland after the Pacific Islands Forum core group talks.
The Australian Foreign Minister, Alexander Downer, responded by saying that it was "the way of the world these days".
The chief advisor to the government of PNG, Joshua Kalinoe, says that the Australian High Commissioner has been told that failure to receive a favourable response will lead to undesirable consequences in some aspects of PNG-Australia bilateral relationship.