The move comes amid reports that paedophiles were also adopting or fostering poverty-stricken children from Bali which is struggling to rebuild its economy and tourism after bombings in October 2002 killed over 200 people.
Australian Federal Police (AFP) Commissioner Mick Keelty said an officer - appointed with Indonesia's permission - would target child abuse by wealthy foreigners, many of whom are Australian.
"The biggest priority he will have, outside terrorism and prosecutions for the Bali bombings, is child sex tourism," Keelty told a parliamentary committee.
AFP Acting Deputy Commissioner John Lawler said the officer would also investigate reports of children being abused after being adopted or fostered by foreigners on the tropical island.
"We're aware of circumstances where it occurred," he said.
While child sex tourism is widespread across Southeast Asia, the extent of the problem in Bali only hit the spotlight in Australia last month with the arrest of former diplomat, William Brown, 51, who is awaiting trial on charges of abusing two Balinese boys, aged 13 and 15.
Australian watchdog Child Wise said it was concerned about growing numbers of reports of child abuse in Bali and the lack of action since 2001 when it presented a list of 14 suspected paedophiles in Bali, mostly Australians, to police.
"Bali is very vulnerable at the moment. The bombings destabilised the island's economy and stopped access to foreign income, leaving families and children open to exploitation," Child Wise's National Director Bernadette McMenamin said.
"Bali is very vulnerable at the moment. The bombings destabilised the island's economy and stopped access to foreign income, leaving families and children open to exploitation"
Child Wise National Director
"There are some very serious claims being made about children going missing as well as sexual abuse," she said, adding that a lack of action so far had created an impression of Bali being tolerant towards tourists preying on young girls and boys.
Keelty said he hoped the close relationship between Australian and Indonesian police forged since the Bali bombings would aid investigations into child exploitation which had failed in the past due to a lack of physical and admissible evidence.
"Should we be able to mount evidence sufficient for a prosecution that will be done," Keelty said.
But Keelty defended Australia's efforts to combat child sex tourism since legal changes in 1994 made sexual activity with a child under 16 years committed overseas a criminal offence in Australia. This carries a jail term of up to 17 years.
He said since 1994 the AFP had investigated 71 people within Australia, leading to 12 convictions, and helped agencies in 12 other countries charge 22 Australians, with eight convictions.