The envelope with the contamination was mailed as a public backlash rages against the conviction in Bali of an Australian on drug charges.
Australian authorities said on Wednesday that white powder in the envelope belonged to a family of agents that can cause anthrax, a sometimes deadly infectious disease triggered by a spore-forming bacterium that can be used as a biological weapon.
"It is not an innocent white powder. It is some kind of biological agent. They say it belongs to the bacillus group," Prime Minister John Howard told Australian television.
The bacillus group contains various forms of bacteria, one of which can cause anthrax, that killed five people in the United States in late 2001, after it was found in letters to the media and government offices in Washington, Florida and elsewhere.
Normal mail service
Australian Federal Police said the envelope was delivered to the embassy around 10:30am (0030 GMT) through the normal mail service and identified as suspicious by embassy staff.
Polls show 90% of Australians
believe Corby(R) is innocent
Marty Natalegawa, a spokesman for the Indonesian Foreign Ministry, said the 52 staff at the embassy were undergoing a "decontamination process" that involved being washed with special chemical substances and having their health monitored.
"We will not be intimidated by such a cowardly act, and we want the embassy to be active as soon as possible. We should take the higher moral ground and not match what has been done by a group of people in Australia," Natalegawa added.
Australian Foreign Minister Alexander Downer said the embassy staff could be isolated for 48 hours.
Beauty therapist Schapelle Corby, 27, was sentenced to 20 years jail last Friday for smuggling 4.1kg of marijuana into the resort island of Bali in October.
Howard said it would be a "remarkable coincidence" if the incident at the embassy was not related to the Corby case.
"We will not be intimidated by such a cowardly act"
spokesman, Indonesian foreign ministry
Corby's conviction sparked an emotional backlash in Australia, with the Indonesian embassy receiving threatening telephone calls and many Australians calling for a Bali boycott and a return of their Indonesian tsunami aid donations.
Corby says she is innocent and that the drugs found in her surfboard bag by a Bali customs officer were planted there by someone at an Australian airport.
Newspaper polls show 90% of Australians think Corby is innocent.