Australia's spy agency warned Scott Morrison his idea to relocate the embassy in Israel from Tel Aviv to Jerusalem could provoke violent unrest in Palestine.
The prime minister still went ahead with the announcement, which also caused tension with Indonesia and threatened a major trade deal.
The ASIO bulletin, obtained by the Guardian Australia, flagged possible violence due to the announcement, as well as the ramifications of voting against Palestine in the United Nations, which Australia did two days later.
But Mr Morrison said his decision went to cabinet and there had been no violent backlash in the Middle East.
"ASIO has no evidence at this time of any planned violence in response to the government's announcement," Mr Morrison told parliament on Thursday.
Mr Morrison raised the idea of moving the embassy days out from the by-election in the Sydney seat of Wentworth, one of Australia's most Jewish electorates.
He accused the Labor Party of being "anti-Semitic", sparking a furious response from the opposition in question time.
Indonesian Foreign Minister Retno Marsudi told her Australian counterpart Marise Payne just how awkward the sudden decision was for her in a series of WhatsApp messages revealed on Seven News.
"Is this really necessary to do this on Tuesday," Ms Retno wrote, on the day she was due to meet visiting Palestinian Foreign Minister Riyad al-Maliki.
"It will be a really big blow. It will slap Indonesia's face on the Palestine issue. This will affect bilateral relations."
Opposition foreign affairs spokeswoman Penny Wong said the government was creating the political tension with Indonesia, the world's largest Muslim country.
"This is the price you pay when you put politics before good government," Senator Wong told reporters.
The federal government has played down concerns Mr Morrison's idea to shift the Australian embassy could derail a soon-to-be-signed trade deal with Indonesia.
Arab ambassadors are also deeply concerned at the idea of moving Australia's embassy in Israel to Jerusalem.
The Council of Arab Ambassadors in Canberra says the move would do nothing to kick-start stalled peace talks between Palestine and Israel.
"This is an irresponsible policy that comprise the future of millions of people in the Middle East for a handful of votes in Wentworth," Australia Palestine Advocacy Network president George Browning said.
Mr Morrison said the leak of the ASIO bulletin had been referred to the Australian Federal Police for investigation. He said the agency provides information to state and federal governments.
Australian Associated Press
