The row between the allies was triggered off by a hijack alert issued by the United States Department of Homeland Security.
The alert, sent to US airlines, cited new intelligence information indicating Australia was among targets for new hijackings planned by the al-Qaida.
Australian officials however insisted on Thursday that the warning should have identified the country as a possible "point of origin" for a hijack, not a target. The targets of the plot, they claimed, were in eastern US or Europe. The US warning was subsequently revised.
But Foreign Minister Alexander Downer publicly dismissed the revised US warning, scoffing at the idea someone would hijack an aeroplane in Australia to attack Europe or the eastern US.
"It is far-fetched to imagine that someone would hijack a plane in Australia and fly it all the way to the east coast of the United States or to Great Britain, landing it a couple of times along the way to refuel, in order to launch a terrorist attack," he said.
Government critics saw the muddle as another illustration of intelligence mismanagement similar to the way the US, Britain and Australia used faulty reports about Baghdad's alleged nuclear programme to justify the invasion of Iraq.
"It is far-fetched to imagine that someone would hijack a plane in Australia and fly it all the way to the east coast of the United States or to Great Britain."
Alexander Downer, Australian Foreign Minister
"The Australian people should be legitimately sceptical about the basic competence of the government's handling of this matter over the last 24 hours," said Kevin Rudd of the opposition Labour Party.
Suspect on trial
Meanwhile in Perth, a British-born Australian citizen who claimed he was trained by al-Qaida to use explosives was ordered on Thursday to stand trial for allegedly plotting to blow up Israeli diplomatic missions in Australia.
Muslim convert Jack Roche is charged with conspiring between February 15 and May 26, 2000, to bomb the Israel's embassy in Canberra and consulate in Sydney.
The prosecution alleges Roche hatched the plot during trips to Malaysia, Pakistan and Afghanistan.
Roche was arrested last November, just weeks after his home was raided by federal agents as part of Australia's crackdown in the aftermath of the Bali bombings on October 12.