FEARING a diplomatic incident, Australian consular officials in New York have had to step in and settle an outstanding $8000 hotel bill for a Liberal MP who is still refusing to pay.

Federal politician Steve Ciobo has vowed to fight the federal government in court over the account for a three-month stay at New York's ritzy Bristol Plaza late last year while he was on a US exchange program.

An email obtained by The Daily Telegraph revealed the incident reached the highest diplomatic levels in New York, after the hotel issued a letter of demand for the bill to be paid.

"The lack of payment is causing irreparable damage to the relationship (consulate) Post has enjoyed with the Bristol Plaza dating back more than 10 years," said the email to the Department of Finance from the Australian Consulate-General in New York City, dated May this year.

"Furthermore we fear it may negatively affect the reputation of the Australian Government more broadly throughout the network of hotels and agencies in New York."

The consulate warned that the hotel was threatening to take the Australian government to court to recover the money which had been in arrears for six months.

The outstanding amount of $7486 was finally paid by the Australian mission in New York to prevent a diplomatic controversy.

But the Department of Finance in Canberra is refusing to reimburse the mission and has issued several letters of demand to Mr Ciobo to pay up.

Mr Ciobo was on a UN exchange program in the US late last year, a program which is funded by the Australian government.

Other MPs on the exchange, including Labor MP Kelvin Thomson, were allocated one-bedroom apartments by the department of finance at $11,300 a month, which the department said was standard policy. Mr Ciobo, however, had asked the department to find him a cheaper two-bedroom apartment elsewhere, because he would be staying with his pregnant wife and their two-year-old child.

Mr Ciobo says he was trying to save the department money.

But the day Mr Ciobo flew out to New York, the matter had not been resolved and he ended up taking a two-bedroom apartment at the Bristol at almost $14,000 a month.

When it came time to pay the bill, the Department of Finance refused to cover the cost of the difference between a one and two-bedroom apartment. And so has Mr Ciobo.

Mr Ciobo, speaking from overseas, told The Daily Telegraph that he would be prepared to go to court to take on the department, claiming they were so incompetent that they ended up costing taxpayers more money.

In an email back to the department, he said: " I do not appreciate having my name sullied by departmental officers."

Originally published as MP refuses to pay $8000 hotel bill