INDONESIA has cancelled all military ties with Australia and suspended people smuggling cooperation as it dramatically ramped up its response to the phone tapping conflict.

A furious Indonesian President Susilo Bambang Yudhoyono has demanded an official explanation from Australia about revelations that defence spies tapped his mobile phone in 2009.

He will also request an apology from Prime Minister Tony Abbott.

"I am still waiting,'' Dr Yudhoyono said today.

The president said he would send a letter of demand to the Australian government, requesting an official apology and an explanation from Prime Minister Tony Abbott.

Indonesia will also suspend all military cooperation with Australia, the president said.

Australia Defence Minister David Johnston's office said there was no official confirmation yet that Indonesia had halted defence cooperation activities.

"But it is certainly on the record that it has stopped,'' a spokesman said.

"We are just waiting on the details of how this is going to play out.''

At a press conference at his presidential palace in Jakarta, Dr Yudhoyono likened the spying claims to cold war tactics.

It's difficult for me to understand why the (wire-tapping) was conducted,'' Dr Yudhoyono said.

"Now is not the era of the cold war.''

Dr Yudhoyono said "coordinated military cooperation'' including naval patrols would cease immediately.

"I have asked for that to be halted until everything is clear,'' he said.

Suspending cooperation on people smuggling will deal a big blow to Mr Abbott's asylum seeker policies.

"You are well aware that we are facing a joint problem of people smuggling that has been a problem for both Australia and Indonesia,'' Dr Yudhoyono said.

"Indonesia and Australia is not in the position of confronting each other or in enmity.''

The president said he could not understand why Australia had chosen to spy on a ``friend and not the enemy'', adding that he viewed the conduct of the Australian government as an illegal action.

Dr Yudhoyono said he wanted a personal explanation, insisting comments directed at "Australia's domestic community'' would not suffice.

``If Australia wants to maintain a good relationship with Indonesia in the future, there must be an official explanation,'' he said.

Dr Yudhoyono said cooperation in the area of intelligence gathering and the sharing of information would also be halted.

"I have also asked to stop for a while joint training between Indonesian soldiers and Australians, whether army, navy or air force,'' he said.

Dr Yudhoyono said he wanted to make it clear that cooperation on combating people smuggling would not go ahead until he received an explanation from Mr Abbott.

"It's impossible for us to continue when we're not sure that there's no tapping of Indonesian soldiers who are performing a duty for both countries,'' he said.

Mr Abbott earlier told Parliament he will not "overreact" to the spying controversy.

His comments came as Indonesia officially "downgraded" its relationship with Australia in the wake of the spying allegations.

"The downgrading in the level of the Indonesian-Australian relationship has been done," Indonesian Foreign Minister Marty Natalegawa said today.

"We have taken measured steps in accordance with their response and attitude."

In a clear reference to admissions from Indonesia it targeted Australian MPs phones during the 1999 East Timor crisis, Mr Abbott said people did not overreact then.

He acknowledged Australia's targeting of the phones of Indonesian President Susilo Bambang Yudhoyono, his wife and senior officials weeks after terrorist bombings in Jakarta killed three Australians was "personally hurtful" to the country's leader.

"I do note there have been allegations and admissions in the past on this subject, people didn't overreact then, I certainly don't propose to overreact now," he said.

"My intention, not withstanding the difficulty of these days is ... To build strong relationships with Indonesia, which is so important for both our countries."

When a former Indonesian spying chief admitted to targeting the phones of Australian MPs, then prime minister John Howard refused to comment.

Indonesian Foreign Minister Marty Natalegawa commented on the "downgrading'' on his way into the Indonesian foreign ministry in Jakarta for a meeting with the country's ambassador to Australia Nadjib Kesoema.

"We have already adjusted various forms of co-operation,'' he said.

"We are turning off the tap by degrees.''

RAMIFICATIONS: CORBY'S PAROLE AT RISK

Dr Natelagawa also slammed Prime Minister Tony Abbott's refusal to apologise for Australian spies who in 2009 tapped the phone of President Yudhoyono, his wife and senior ministers.

Mr Abbott expressed regret for any embarrassment caused to the President.

"I don't get it. Why would the President of Indonesia be embarrassed?'' Mr Natalegawa said.

Indonesia and Australia have developed close law enforcement links to fight terrorism and people smuggling, but the reality is that Australia is more important to Indonesia than vice-versa.

We provide $580 million in foreign aid funds and two-way trade was valued at almost $15 billion last year.

That includes $2.3 billion worth of agricultural exports and $2.5 billion in petroleum sales from Australia.

It comes as a former Indonesian spymaster openly boasted about spying on Australian politicians and officials and said that Australia would be "silly" if it didn't do the same thing.

As the diplomatic fallout widened over Australian phone intercepts of the Indonesian president, his family and staff, security experts and former spies accused Jakarta of hypocrisy and confected outrage.

When he retired in 2004 Indonesian spymaster General Abdullah Mahmud Hendropriyono revealed his agency had not only tapped Australian civil and military communications and politicians' phone calls during the 1999 East Timor crisis, but had also unsuccessfully attempted to recruit Australian officials as double agents.

Then Prime Minister John Howard offered a muted diplomatic response to the explosive allegations and maintained Australia's relationship with Indonesia remained "very strong".

"I am not going to talk about any aspect (of) something like that,'' Mr Howard said at the time.

"I neither confirm nor deny stories about those sorts of security things.''

In stark contrast to this, President Susilo Bambang Yudhoyono has taken to Twitter to voice his anger and to tell his people that his government had "protested loudly" to Australia over the claims and sought an explanation.

"We will also revisit our of bilateral co-operation agenda," he told his four million Twitter followers and he threatened "painful consequences" for Australia.

"I also regret the statement of Australian Prime Minister that belittled this tapping matter on Indonesia, without any remorse."

Prime Minister Tony Abbott has refused to apologise for the 2009 intercepts of Indonesia, revealed this week by whistleblower Edward Snowden, saying all governments "gathered information and knew that others did the same".

"Australia should not be expected to apologise for the steps we take to protect our country now or the past, anymore than other governments should be expected to apologise for the similar steps that they have taken," Mr Abbott told parliament.

Mr Abbott expressed his regret about any embarrassment to the president caused by the public airing of the spying issue.

"Australia has deep respect for Indonesia, for its government and for its people," he said.

Indonesia's Foreign Minister Marty Natalegawa yesterday responded to Mr Abbott's comments saying that Australia not Indonesia should be embarrassed following the disclosure.

"I don't get it. Why would the President of Indonesia be embarrassed?" Marty said in an exclusive interview with Channel News Asia.

"I believe the embarrassment should belong to the government of Australia. They are the ones … the intelligence community in Australia … who have committed this unacceptable practice," Marty added.

News_Rich_Media: Abbott maintains silence on spy claims

Opposition leader Bill Shorten said US President Barack Obama's apology to German Chancellor Angela Merkel over spying allegations was a better model.

But senior Labor MPs today backed away from their leader's suggestion.

Labor frontbencher Richard Marles denied Mr Shorten was asking the government to take a more conciliatory stance.

"We are going to support and back the government in doing what they need to do to repair this relationship," he told Sky News today.

Colleague Tony Burke was reluctant to add to Mr Shorten's comments.

"I'm not going to add to the words Bill Shorten put forward," he told reporters, adding it was in Australia's interest for the row to be resolved as quickly as possible.

The most important thing was that Mr Abbott not allow the issue to become "a running sore".

The Australian Greens are not nearly as supportive of the way Mr Abbott is handling the issue, accusing the PM of appeasing red-neck voters at home by refusing to make an apology.

"It's time to take a step back and stop the chest-beating," deputy leader Adam Bandt told reporters.

Government minister Jamie Briggs dismissed Mr Bandt's comments as being as "irrelevant as the person who made them".

"The Prime Minister is walking deftly through it," he told Sky News of the diplomatic row, adding the issue was a "speed hump" in the Australian-Indonesian relationship.

Experts warned that President Yudhoyono had been cornered by the revelations that played directly into the hands of his many enemies and that he would be bound to retaliate.

As Indonesia's ambassador to Australia, Nadjib Kesoema, departed briskly for Jakarta on Tuesday, the pages of the country's newspapers were dominated by calls for an even tougher response to the latest claims.

Former agent with the overseas spy agency the Australian Secret Intelligence Service (ASIS) and Indonesia expert Warren Reed said any government would be duty bound to "flap its wings" such as Indonesia was doing.

Australian National University academic Peter McCawley said President Yudhoyono was stung and cornered and that he would retaliate.

"Australia is misreading the situation and there is a long period of uncertainty ahead before and after the 2014 Indonesian elections," Dr McCawley said.

ASIO chief David Irvine hinted to a Senate Estimates hearing that Australian agencies were confident there would be no more surprises from National Security Agency leaks by US whistleblower Edward Snowden.

"I can't talk for the counterpart agencies in the United States, but I am satisfied that the standards that we adhere to and other agencies within the Australian Government seek to adhere to, certainly do aspire to be very high," he said.

When contacted yesterday an Indonesian embassy spokesman in Canberra said there would be no comment.

A spokesman for the Indonesian president late today insisting that Australia's response to the allegations to date had been inadequate.

"Of course this is regrettable, the president regretted the Australian prime minister's response,'' presidential spokesman Julian Pasha told reporters.

Indonesian Foreign Minister Marty Natalegawa later warned Australia should not underestimate the effect the controversy had caused.

"Australia still needs to develop their attitude and response, because this is something that can't trivialised or underestimated (in terms of) its impact,'' Dr Natalegawa said at the presidential palace.

"We will evaluate day by day its development. It's not us who brought this problem, it's Australia. And so Australia is the one who must find the best solution for this.''

Indonesia spy scandal to hit trade: Katter

Federal MP Bob Katter says the Indonesian spying scandal will be a huge blow to bilateral trade.

The crossbencher says relations were already fragile because of asylum seekers and after Australia "cut off their food supply" when it halted live cattle exports in 2011.

He said reports that Australia's electronic spy agency tapped the phones of President Susilo Bambang Yudhoyono and his wife will be a huge blow to bilateral trade.

"They've said all bilateral agreements are off," he told ABC radio today.

"I can't interpret that as anything else except we're in a lot of trouble here."

Mr Katter called for Prime Minister Tony Abbott to immediately apologise to President Yudhoyono.

"Tony, geez, if your country, your government, the government of Australia has done something wrong, the onus is upon you to apologise," he said.

"Think if the Indonesians were tapping the telephones of our prime minister and his wife ... this is not acceptable behaviour.

"I mean spying on each other, yeah every country does that all the time, but not on the head of state and his wife."

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