The Australian Government is expelling an Israeli diplomat because of the use of faked Australian passports linked to the assassination of a Palestinian commander in Dubai earlier this year.
Australian Foreign Minister Stephen Smith says Israel's action was not what Australia expected from a nation with which it had such a close relationship.
Britain took similar action in March, after concluding that Israel was responsible for the use of forged UK passports in the plot.
The Israeli foreign ministry said Australia's decision was disappointing.
At least four forged Australian passports were used in the killing of Mahmoud al-Mabhouh Hamas in a hotel room in Dubai on 19 January. The originals belonged to Australians living in Israel.
The Australian government said a police investigation had left it in no doubt that the Israeli authorities were behind "the abuse and counterfeiting of the passports".
As a result, Mr Smith asked Israel to withdraw a diplomat, whom he did not identify. He said the decision was "not something which fills the Australian government with any joy."
The BBC reports passports from France, Ireland, Germany and Britain were used in the operation.
The Israeli government has said there is no proof that it was behind the killing, although Dubai officials have said they are 99.9% sure that agents from Mossad were responsible.
Deputy opposition leader Julie Bishop says the government has over-reacted and is using the situation to build support among Middle Eastern states for its bid for a seat on the United Nations security council.
But Mr Smith said the government conducted its own investigation.
He confirmed investigations by the Australian Federal Police and security agencies showed Israel fabricated the passports of four Australians who also had Israeli nationality.