Australia's Muslim-majority neighbours in Asia have warned the Morrison government not to go ahead with a potential plan to move its embassy in Israel to the city of Jerusalem, saying it could embolden extremist groups to commit further attacks.

Malaysia's Prime Minister Mahathir Mohamad raised the issue during a meeting with Scott Morrison in Singapore on Thursday.

"I pointed out that in dealing with terrorism, one has to know the causes," Dr Mahathir told reporters.

"Adding to the cause for terrorism is not going to be helpful."

AAP

The warning was echoed by Indonesian politicians.

"Australia's consideration on moving its embassy will affect Indonesian people at grassroots, the people who are low in literacy," Indonesian opposition politician Dian Islamiati Fatwa told Fairfax Media.

"Some of them are the radicals. They may target any western people, they may think he or she is Australian just because they look western.

"So I think we need to guard this issue together."

An Indonesia analyst for Human Rights Watch told SBS News the Israel/Palestine dispute had become a ‘lightning rod’ for both moderate and radical Islamic groups in Indonesia, who would pressure their government to punish Australia if the embassy plan went ahead.

Andreas Harsono said he predicted “mass rallies” and “massive traffic jams” in the streets around the Australian embassy in Jakarta if the plan was implemented.

Mr Morrison has promised to "review" the merits of moving the embassy from Tel Aviv to Jerusalem and told reporters to expect a decision before Christmas.

Treasurer Josh Frydenberg said the prime minister was "absolutely right" to consider the move and hosed down the comments from Malaysia and Indonesia.

"We're absolutely right to commence this process and call out some of the double standards that have been applied by countries, including in our region and more broadly afield, against Israel and its history and its values," Mr Frydenberg told ABC radio on Friday.

The senior minister also expressed concern over the Malaysian prime minister's past comments about Jews, noting neither his nation nor Indonesia recognised Israel.