Scott Morrison has told the Indonesian president that Australia will make a decision on relocating its embassy from Tel Aviv to Jerusalem by Christmas, and insists his government is motivated by wanting to see progress towards a two-state solution.

The fraught meeting with Joko Widodo kicked off Morrison’s program at the Asean summit in Singapore, and followed a warning from the Indonesian trade minister, Enggartiasto Lukita, that Jakarta will not sign off on a free-trade deal with Canberra if the Morrison government shifts the embassy.

Morrison flagged the embassy shift in late October, sparking an immediate diplomatic backlash in Jakarta that has put the trade deal at risk. Separately the defence minister, Christopher Pyne, has articulated a more nuanced position where there would be an Australian embassy in West Jerusalem and a separate diplomatic presence in East Jerusalem.

In the same week Morrison suggested Australia could follow Donald Trump’s policy, Pyne said: “I believe that we should consider whether it would assist to create the two-state solution in Israel and Palestine for there to be an Australian embassy in West Jerusalem and a Palestinian state with its capital in East Jerusalem and our embassy therefore in their state in East Jerusalem.”

Morrison has not articulated that stance publicly, although Pyne has said that is the proposal the Australian government is considering. It is unclear whether the position the defence minister telegraphed publicly has been conveyed to Jakarta in the context of aiding the two-state solution.

The Palestinians want to divide the city and make East Jerusalem the capital of a future Palestinian state.

The Asean summit is Morrison’s first opportunity to mingle with other world leaders since taking the Liberal leadership in August. Morrison on Wednesday evening was meeting with the New Zealand prime minister, Jacinda Ardern, with Ardern expected to restate the country’s longstanding offer to resettle asylum seekers from Nauru.

The Australian prime minister was also due to meet the Chinese premier, Li Keqiang. Earlier in the day he met the Indian prime minister, Narendra Modi, with sugar subsidies a point of friction.

The Israel embassy row is now a significant political problem for Morrison, with the controversy sparking internal questions about his political judgment, and with the landmark trade deal now in the balance.

The prime minister also had to slap down an intervention from the Liberal backbencher and chair of parliament’s foreign affairs, defence and trade legislation committee, Eric Abetz. The senator declared if the Indonesians wanted to “dictate” Australian foreign policy, then perhaps Australia should rethink aid contributions.

If Indonesia really wants to dictate Aus foreign policy on the middle east, should we rethink the $360 million each year we give them in aid? Instead, how about we calmly finalise this FTA which will lift many Indonesians out of poverty and assist Australian farmers and jobs. — Eric Abetz (@SenatorAbetz) November 13, 2018

Morrison told travelling reporters in response to Abetz’s provocation that “Australia has been always there for Indonesia, and that is respected and appreciated by Indonesia”.

The Australian prime minister played down the tensions between Canberra and Jakarta. He said the bilateral meeting on Wednesday allowed the opportunity for a “respectful and friendly discussion about the issue and, as I said, we’re both motivated by wanting to see a two-state solution”.

“And for those who have been around this issue a long time, there’s a lot of frustration about the progress towards that, and we want to see that happen, and that’s what’s motivating me,” Morrison said. “That’s what’s motivating our government’s consideration of the issue and that’s what will be informing the process.”

In Australia, Labor blasted the government for creating the controversy.

The shadow foreign affairs minister, Penny Wong, declared the Singapore trip “has now exposed in full the utter debacle created by Mr Morrison’s desperate decision to trash decades of considered bipartisan foreign policy to try to win a few votes in Wentworth – and didn’t that go well?”

Wong referenced a warning from the former prime minister Malcolm Turnbull that the embassy shift would derail one of Australia’s most important foreign policy relationships in our region.

“This decision from Mr Morrison is harming our economy, costing jobs and damaging one of Australia’s most important relationships,” Wong told parliament.