The Federal Government is not ruling out the possibility that US military surveillance drones could be based on Australia's strategically important Cocos Islands.

Reports from Washington suggest the US is considering using the islands, located in the Indian Ocean off Australia's north-west coast, to launch unmanned surveillance aircraft.

The Washington Post says: "US and Australian officials said the atoll could be an ideal site not only for manned US surveillance aircraft, but for Global Hawks, an unarmed, high-altitude surveillance drone."

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Listen Duration: 9 minutes 16 seconds 9 m Smith says Cocos Islands could host drones Download 4.2 MB

The islands are reportedly being looked at as an expansion for the overcrowded US airbase at Diego Garcia in the Indian Ocean.

The report follows an agreement for closer military ties struck during US president Barack Obama's visit to Canberra last year, when Defence Minister Stephen Smith acknowledged a potential greater utilisation of the islands.

Prime Minister Julia Gillard has confirmed that officials from Australia and the US have been discussing increased defence cooperation in the region, including possible greater use of the islands.

She did not deny the reports, but said there had "not been any substantial progress" made on many of the matters discussed with the US in November.

"Look, I'm not going to play a rule-in, rule-out game about something that's been discussed at officials level," she said.

'Long-term prospect'

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 13 minutes 50 seconds 13 m Smith says Cocos Island base 'not a priority'

This morning Defence Minister Stephen Smith told AM that the Cocos airstrip would need to be upgraded to be able to launch the drones and stressed that it was "very much a long-term prospect".

"It's not currently ideal because one of the first things that we would have to do, and this has been agreed between me and my counterparts, is a substantial infrastructure upgrade, particularly so far as the airfield is concerned," he said.

"That's one of the reasons why this is very much a long-term prospect. So again, I say, people should not get ahead of themselves."

Mr Smith said US and Australian officials were looking at "three priorities" in the wake of the agreement with Mr Obama.

He said they were: the basing of US Marines in Darwin; greater air traffic through northern Australia; and, in the longer term, American access to the Navy's HMAS Stirling base in Perth.

"I also indicated that down the track Cocos was a possibility, but there have been no discussions that I've had with my counterparts, whether that's Bob Gates or Leon Panetta, about any of the detail of that. It's a long term prospect and should be treated as such."

Andrew Davies from the Strategic Policy Institute says the US is considering the Cocos Islands because its lease on Diego Garcia is nearly expired.

"My understanding is that the lease on Diego Garcia is up in 2016. So that's four years from now, which by military planning and building standards is relatively [soon]," he said.