"No government can tolerate the abuse of its passports, especially by a foreign government," the foreign minister said.
"This represents a clear affront to the security of our passport system."
Australia and Israel had been close allies prior to the incident.
The scandal over the use of fake passports erupted after the January 20 murder of the Hamas commander.
Police in Dubai identified dozens of people involved in the assassination, who entered the country using fraudulent British, Irish, French, German and Australian passports.
According to the Wall Street Journal, Dubai police are also seeking the arrest of another British man in connection with the assassination.
Interpol is understood to have issued an arrest warrant for Christopher Lockwood, a 62-year-old British national, following a request from the Dubai police.
Britain expelled an Israeli diplomat in March after also concluding that Israel was responsible for forging 12 British passports to facilitate the killing.
In February, Avigdor Lieberman, the Israeli foreign minister, said there was no evidence to link his country to the assassination.