Beijing accuses the World Uighur Congress led by Kadeer of being a front for separatists pushing for an independent East Turkistan homeland.
Jeff Daniels, who directed 10 Conditions, told Al Jazeera the Chinese official who spoke to the festival director insisted Kadeer was a criminal and that anything to do with her should not be heard or seen.
"We stick by our guns. We'll play it and we won't bow to that form of bullying"
Richard Moore, Melbourne Film Festival director
Kadeer, who was jailed in China for several years until being released into exile in the US, is expected to attend the festival next month.
"It's a terrible inconvenience but more than that, beyond the inconvenience, it's a terrible thing to happen to the festival that all this political pressure has been brought on us this year," Richard Moore, the festival organiser, told Australia's ABC radio as the Chinese boycott became clear.
But he added: "We stick by our guns. We'll play it and we won't bow to that form of bullying."
|Rio Tinto denies allegations that its staff tried to bribe Chinese steel mills [Reuters]
Australia's relations with China – an increasingly important trade partner – became strained earlier this month following the detention of Rio Tinto staff accused of commercial spying, allegations the company denies.
In the latest diplomatic moves in the case Stephen Smith, Australia's foreign minister, said he had asked his Chinese counterpart, Yang Jiechi, for the case to be dealt with quickly.
He also added that the case would not affect bilateral ties.
"I pressed the point that we believe this matter should be dealt with expeditiously," Smith told reporters on Thursday at a regional security meeting in Phuket, Thailand.
"He made the point that so far as China is concerned, this is an individual matter, they're conducting an investigation. It goes to matters of corruption and bribery… it also goes to state secrets, as defined under Chinese law."
The detentions have raised concerns among foreign governments and investors about doing business in China and overshadowed critical 2009 iron ore price negotiations.
|China is the biggest importer of Australia's mineral resources [EPA]
While Smith pressed the case with Yang, another Australian official tried to reassure some of China's largest state-owned enterprises they were still welcome to the resource-rich Western Australia.
Colin Barnett, the premier of Western Australia, told reporters that Chinese companies were frustrated by Australia's tough foreign investment rules, and their efforts need to receive "special policy attention".
Barnett said he understood Chinese frustration after a $19.5bn bid by state-owned aluminium firm Chinalco for a stake in Rio Tinto was rejected in June.
"I think Chinalco behaved impeccably throughout that and I can understand their disappointment," Barnett said.
"We should not have been having a debate over whether 18 per cent was too much or too little."
China is Australia's biggest trade partner, with combined trade worth $53bn last year.