Chen Yonglin, the 37-year-old consul for political affairs at China's consulate in Sydney, appeared at a public rally on Saturday in the city to mark the anniversary of the Tiananmen Square massacre of pro-democracy activists in 1989 and said he had walked out of the mission four days ago.
Because he had "offered some help to some democracy activists and Falun Gong practitioners in some way", the Chinese government considered him to be a threat, Chen said.
Falun Gong is an amalgam of religions, meditation and exercises that Beijing considers to be a cult.
The Sydney consulate said on Sunday that Chen had reached the end of his four-year stint in Australia and was making up stories because he did not want to return to China.
"To achieve the aim of staying in Australia, Chen Yonglin fabricated stories, which are unfounded and purely fictitious," the consulate said in a statement.
Immigration Minister Amanda Vanstone said Chen's asylum application would not receive special treatment from officials in Canberra.
Vanstone also refused to comment on statements that Australian officials had warned him his actions "will cause serious consequences", possibly impacting on Canberra's burgeoning trade relationship with Beijing.
Australia and China are in talks
on signing a free trade accord
Chen's asylum application comes as the Australian and Chinese governments work towards establishing a bilateral free trade agreement worth an estimated 24.4 billion Australian dollars(US$18.5 billion) to the Australian economy over a 10-year period.
Chen said he was in hiding with his wife, Jin Ping, 38, and six-year-old daughter as he feared he would be kidnapped by Chinese agents.
The Weekend Australian newspaper reported Chen had applied for political asylum but officials had ruled this out and that Chinese consular security staff were searching for him.
Chinese embassy officials could not be reached for comment.
"The problem for the government is that if this were back in the old Cold War days, and a person had fled from the communist embassy, we would have welcomed the person with open arms as we did with the Petrov scandal 40 years ago," international affairs analyst Keith Suter told Sky News television.
"But now, of course, China is a major trading ally for Australia and we don't want to do anything that's going to be offending China in terms of its trade policies," Suter said.
"Now, of course, China is a major trading ally for Australia and we don't want to do anything that's going to be offending China in terms of its trade policies"
Australian international affairs analyst
In 1954, a senior Soviet diplomat in Australia, Vladimir Mikhailovich Petrov, defected along with his wife, Evdokia.
The defections led to an extensive inquiry into Soviet espionage in Australia.
Moscow withdrew its embassy from Australia and expelled Australian diplomats.
The diplomat was quoted as saying that he had been monitoring political dissidents, including members of the Falun Gong religious sect, over the past four years, but had not reported on them in protest against Beijing's policies.