Indonesia has frozen military co-operation with Australia amid claims its neighbour tried to eavesdrop on the mobile phone conversations of top Indonesian officials.
The announcement by President Susilo Bambang Yudhoyono marks the lowest point in relations between the pair in 14 years.
It follows increasingly tense exchanges between the countries since Tony Abbott became Australian Prime Minister in September.
Australian officials have yet to comment.
"It's clear that this is a logical step Indonesia must take," said Mr Yudhoyono.
He repeated his demands for an official explanation from Australia over media reports, quoting documents leaked by former US National Security Agency contractor Edward Snowden, that its spy agencies tried to tap his mobile phone and those of his wife and senior officials.
Indonesia had previously cooperated with Australia's border control force Some analysts said the allegations that the snooping involved his wife, Ani Bambang Yudhoyono, may have fuelled Indonesian anger in the latest upset in often prickly relations.
The very public display of anger comes ahead of Indonesia's general and presidential elections next year, with the president's ruling party slipping badly in recent opinion polls.
Among the measures Indonesia will take is a suspension of military co-operation and intelligence exchanges, including over the politically charged issue of asylum seekers, which has long been a thorn in relations.
An Indonesian military spokesman said these would take effect from the beginning of next year.
Mr Abbott has been pressing Jakarta over the issue of boat people who frequently head to Australia via Indonesia.
Mr Yudhoyono said he wanted to return to good relations with Australia once the issue of phone-tapping had been resolved.
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