Islamic nations furious over the Abbott government's policy shift on Israeli settlements have warned they could boycott Australian farm exports if the stance is not reversed.

The government last week ruled out using the term "occupied" to describe Israeli settlements in East Jerusalem, deeming the term pejorative and unhelpful to the peace process in the Middle East.

That has prompted an outcry from Islamic countries, who have written to Foreign Minister Julie Bishop demanding an explanation why this controversial decision was made without consultation.

Palestine's senior diplomat in Australia described the move as "unprecedented" and warned Australia had isolated itself on the world stage by backing "illegal" settlements.

"This statement is not helpful at all to promote the peace process," Palestinian Delegation Ambassador Izzat Abdulhadi told AAP on Friday.

"I think it's an invitation to Israel to continue its settlement activity."

Prime Minister Tony Abbott said it was important not to use "loaded terms" that suggested the matter had been prejudged.

"The truth is they are disputed territories and let's try to ensure that disputes are resolved fairly to all as best we can in an imperfect world," he told reporters in the US.

Islamic nations have warned that the Arab League and Organisation of Islamic Co-operation will discuss blocking Australian agricultural products at their meetings this month.

Such a move would be disastrous for Australian farmers, whose top export markets for sheep and cattle are in the Middle East.

A delegation of about 20 ambassadors from Islamic countries took their concerns to the Department of Foreign Affairs and Trade this week, saying all options were on the table until the government's policy was clarified.

"We want to see a written response from the foreign minister," Mr Abdulhadi said.

Ms Bishop said Australia had a long-standing and mutually beneficial relationship with Arab nations, and remained committed to supplying them with high-quality agricultural products.

Opposition Leader Bill Shorten said the government should consider the repercussions of their policy decisions before announcing major changes.

"Foreign affairs and diplomatic relations require cool heads and sensible comment, not just changing protocols or making sudden announcements," he told reporters in Melbourne.