THE US fears Australia's credibility as a military ally is at risk because of the big spending cuts announced in the federal budget.

US officials have raised their concern privately with Australian counterparts at multiple levels in recent weeks in Washington and in Canberra.

"It's about Australia's ability to work as an ally of the US" ... Richard Armitage. Credit:AP

The cuts announced by the Gillard government in May would reduce Australia's defence budget from the equivalent of 1.8 per cent of GDP last year to 1.56 per cent.

This is the smallest since 1938, the eve of World War II, the Australian Strategic Policy Institute said.