Earlier this year, Australia relocated its Baghdad embassy to an office within the British embassy.
The move comes as the department tries to absorb $425 million in government funding cuts over four years.
DFAT Secretary Peter Varghese has told a Senate estimates hearing he's considering a wide range of options for co-location.
"We have for instance a property group whihc includes the UK, Canada, Australia, New Zealand which looks at how we each handle our overseas property portfolio. The countries will vary according to the issue and with co-location we'd have a reasonably open mind as to which countries may be interested in that."
Mr Varghese says the department is also working to save on wages by employing more locals and fewer Australians in overseas postings, where appropriate.
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