PA threatens Canberra with trade sanctions, UN moves over decision to use more accurate terminology for land over 1949 Armistice lines.

Australia could face trade sanctions by Arab nations over its decision to stop using the term "occupied" when referring to Jerusalem, the head of the Palestinian Arab delegation to Canberra threatened Friday.

Izzat Abdulhadi said Australia's new stance on Jerusalem, the 3,000-year-old capital of the Jewish people which has been wrongly labeled as "occupied" or "illegal under international law" for decades, was a "substantial policy shift".

"We think that it's very provocative and unuseful [sic], and it's not appropriate," Abdulhadi told AFP.

His comments came after 18 diplomats from countries including Indonesia, Egypt and Saudi Arabia protested to Australia's Department of Foreign Affairs in Canberra on Thursday.

Australia said last week it would no longer refer to Jerusalem as "occupied" because the term carries pejorative implications and was neither appropriate or useful.

"It is important, as far as you can, not to use loaded terms, not to use pejorative terms, not to use terms which suggest that matters have been prejudged and that is a freighted term," Prime Minister Tony Abbott said. "The truth is they're disputed territories."

The comments sparked fury in the Arab world, with the Jordanian and Palestinian Authority (PA) governments summoning Australia's diplomatic representative in protest. Israel hailed the move as "refreshing."

"We asked the government to reverse this position," Abdulhadi said of the diplomatic protest.

He threatened that trade sanctions could be put in place against Canberra if the government persisted with its stance, which he said left Australia isolated.

"It depends on the reaction of the Australian government," he said, adding that the issue could also be taken to the United Nations General Assembly. "Unfortunately I think there will be negative consequences for the (Australian) government."

Australia's export trade with the Middle East is significant, accounting for billions of dollars annually, particularly in wheat and meat, with Qatar and Jordan being major markets for live sheep.

"We want to maintain the trade and we will work very hard with them to ensure that that happens," Australian Deputy Prime Minister Warren Truss told reporters on Friday.

Abdulhadi said he would meet Foreign Minister Julie Bishop next week and was hopeful that, after being threatened, Australia could explain the decision.

"Maybe we can avoid all this sort of thing if we can have good discussions," he said.

A Department of Foreign Affairs and Trade spokeswoman said officials at Thursday's meeting of diplomatic officials had agreed to maintain an "open dialogue" on the issue.