CANBERRA (BLOOMBERG) - One of Australia's top leaders has blasted Malaysian Prime Minister Mahathir Mohamad for criticising a proposal to shift Australia's Israel embassy to Jerusalem, citing Dr Mahathir's record of comments disparaging Jews.

Australian Treasurer Josh Frydenberg, who is Jewish, on Thursday (Nov 15) dismissed Dr Mahathir's warning that moving the Australian embassy from Tel Aviv would heighten the risk of terrorism.

He said Australia would make its own decisions based on national interest.

"The Malaysian Prime Minister Dr Mahathir has form," Mr Frydenberg told reporters in Melbourne. "He has called Jews hook-nosed people. He has questioned the number of people that have been killed in the Holocaust. He banned Schindler's List as a movie being shown, even though it showed the amazing story of a righteous Gentile who saved many people from persecution."

Calls to Dr Mahathir's office in Kuala Lumpur weren't immediately answered.

Australia's proposal to follow the US in moving its embassy to Jerusalem has sparked concern throughout the Muslim world.

A planned free trade agreement with Indonesia, the world's most populous Muslim nation, is now on hold until a final decision is made, the Australian Financial Review reported this week.

Australian Prime Minister Scott Morrison, who met Dr Mahathir during regional meetings in Singapore this week, defended Mr Frydenberg on Friday.

The treasurer had been "filling in the history" on Dr Mahathir's "record on various issues over time", Mr Morrison said.

"Australia decides foreign policy," he added. "I am not going to have our policy dictated by those outside the country."